Understanding Differentiation vs. Being Better
So what does it mean to be different and not just better as a company? And this is actually a very perplexing question to not just the CEO, but to a lot of team members as well. If you look back at kind of the grandfather of strategy, Michael Porter, the definition of strategy is engaging in a different set of activities than your competition to create a unique and valuable position.
And that's a lot of really fun mumbo jumbo to say, what are the things that you do differently than everybody else to be successful? And by differently, it doesn't just mean that you're better, you're faster, you're bigger. It's that you do something with your policies, procedures, how you do something that makes you better, that makes you unique from the competition.
Trader Joe’s: A Case Study in Unique Business Practices
One of the most glaring examples of this, one of the most obvious examples I use to wrap people's brains around this, is when, you know, you can look at, say, hey, look at the buying world around you. We've got Kroger, we have Walmart, we have Target, we have other local grocers, we have big names. How does Trader Joe's succeed? And some because they're bigger than those ends. It's not because they're better than those entities. They didn't compete to be the best. How do they win? They win by being different.
So how you might ask a few things. So one, they were the first white labeler companies, at least back in the day. Where they white labeled their own product. And that in and of itself didn't make them unique, at least not for very long. But that's why there are other differentiators tied to that.
Key Differentiators of Trader Joe’s
- Innovative Product Sourcing: Look at their store. It's a small footprint, right? It's not a very big footprint. It's a limited number of SKUs throughout that store. And you're in, you're out pretty quick. As a consumer, you can get a handful of things, but it's not this mass footprint store.
- Store Layout and Customer Experience: It is tied to the way they buy product. Right. So it's not only just the white label, it's how they source and look for products around the world. They have a very supposedly unique buying process that we don't even know all the policies and procedures behind, but the way they buy is they buy in, they buy a few SKUs, right, very deep. And that ties into the small footprint store. They can liquidate that fairly quickly. That also, you know, you'd think that not having a lot of product would be a little bit of a weakness, but they turn that into a strength because they liquidate it quicker.
- Unique Company Culture: When you start to combine those things and you also then combine maybe even the most powerful one, probably the most powerful part of that, which is their culture, not just the way they treat employees, but the way it feels to a customer when they come in. By the way, with their employees, they hire their customer.
They hire someone who is likely overeducated and underpaid, as they like to say. And what that means is they probably have a degree that's maybe not in as popular of a field that, you know, drives you to a higher paycheck over time. And degrees, as we know, don't always do that anymore. And a lot of fields. But in this particular case, they might be overeducated but not have a high paying job. They give them a role and they compensate them in a very good way. So what they want is to hire their customer. And what they do with that is they create a very customer-centric culture with their employees. If you notice when you walk into a Trader Joe's, you ask someone where something is. They literally get it from what they're doing and they'll go look for it if they don't have it out in stock. Very powerful culture.
The Importance of Location Selection
When a Trader Joe's opens, by the way, this might not be differentiated, but this is actually one interesting thing that you hear about Trader Joe's, which is their location selection process, which, you know, pretty secretive, like a lot of them, but may include the number of degree holders in an area, and this kind of fits back to their original mission and vision, which is to help people that are overeducated and underpaid get quality food at the right price. But in that selection process, they're looking for the number of degree holders in an area. And if you look at their locations , you'll see that the Trader Joe's that we have are located in areas where there are a lot more degree holders.
Interdependent Differentiated Strategy
When you combine all those differentiators and there's a lot of policies, systems, procedures between all those three or four or five that I just outlined, that's interdependent, differentiated strategy. That means if you take one part of that strategy, all the systems, processes and procedures underneath it that hold that differentiated tie it to another differentiator in the business, meaning, you know, if we have to order in small amounts or a small number of SKUs because it's tied to the small footprint of the store.
Those two things, while they sound unique, there is so much that goes underneath being able to pull that off. That's why it's hard for a company to go and outright steal your differentiators and get anything out of them, because it's what happens is you build up too much value around how you deliver that service and that value to the customer over time, using those differentiators, policies, systems, procedures, actual physical equipment, those go underneath and support those differentiators over time.
Creating a Cult-like Following
The one thing that you'll say about Trader Joe's, if you look at what their strategy has done, like when they open up, there's always a joke that there is a cult of Trader Joe's because whenever they open up a new location, they are flooded with their customers. People are excited for miles around. They can go to a new Trader Joe's. And one of the things that I always say is that, you know, you've got a good strategy if it results in a cult. So if your strategy results in a cult, you're doing something well. And that's the Trader Joe's example.
Balancing Price, Quality, and Convenience
Another good thing to point out behind all this is that when you look at the rational trade off with price, quality, speed, you want to be one thing in the mind of the consumer. You know, there could be a little bit of a combination of things, but it's mostly one thing in the mind of the consumer. So really what they all are is affordable quality or quality affordable. They're quality first at the right price. That's the second variable they manage. And then they're intentionally bad or not as good at speed. Right. And by speed, in this case, it's what it really means to us is convenience. Meaning, you know, they might stock out if I don't get that Kringle or that item that's there right now, you know, Kringle's the awesome pastry they have. I don't get that item right now. They might stock out. if I don't get it today. And that's when your weakness turns into a little bit of a strength. You can liquidate a little bit faster that way.
Resilience in Changing Markets
So interesting in that, you know, they're built really well strategically, owned by the Albrecht family that also owns Aldi. But if you look at how they put together their business to be able to operate, they operate a highly profitable business that can be successful in many different environments. As a matter of fact, you know, even in a downturn of some kind, I don't really worry that Trader Joe's would be just fine. I don't have the same kinds of comfort with other retailers.
That's differentiated strategy in a nutshell.
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