If you’re new to the Business Life series, check out the first two posts to catch up. By now you should have decided what your ultimate financial vision is in life, what non-negotiable values you carry and your current strengths, weaknesses, opportunities and threats. This all gives you a great foundation for formulating a strategy to reach your vision, using your SWOT analysis to guide you.
In the business world, there are all sorts of strategies they can undertake to succeed. Many of them don’t translate too well to personal financial goals, but there are many that translate perfectly. Here are some strategies almost everybody will likely fall into in one way or another
Cost Leadership Strategy
This is probably the most suitable business strategy that does translate well to the world of financial independence, and it’s the one most bloggers really focus on. Cost leaders aim to improve their profits (in this case, savings rate) by reducing their costs to the absolute lowest possible level. From a business perspective, having incredibly low costs allows a company to either reduce their selling prices below the competition to attract more customers, or they can charge the same price as competition and experience higher profit margins.
An example of a business that has dominated this landscape is Ikea. Rather than selling pre-made furniture and paying a load of people to make each and every item, they designed furniture that could be mass made where people at home could put it together themselves, they just sell the parts in a neatly organized box, basically removing all of the costs of production other than cutting the pieces of furniture to the correct dimensions (which a machine does). This was (and still is) revolutionary, and it’s why Ikea furniture is incredibly cheap and incredibly successful.
Pro: This is likely the easiest approach that anybody can undertake regardless of knowledge/skill. Can be achieved throughout your entire life.
Con: You will have to compromise on the quality of life you might desire, which is fine for some but not others.
Who Does This Suit? Lower income households. People who are content living a frugal lifestyle.
Income Leadership Strategy
There isn’t really an “income leadership” business strategy, as frankly all businesses want to maximize their income to the highest possible level. In terms of personal finance, income leadership is essentially the opposite of cost leadership. The focus is heavily placed on obtaining promotions, pay rises, bonuses or even taking on side projects or second jobs to increase income to the highest possible level. Anything a person can do to maximize income, essentially.
Pro: Income potential is unlimited, unlike cost reduction. Results can be significantly better for a person who has the ability and drive to maximize income as opposed to reducing costs.
Con: Far more demanding than cost leadership, can be difficult to achieve without the necessary skills, expertise, education and opportunity. Can lead to lifestyle creep which might negate the income.
Who Does This Suit? Highly motivated, driven and determined individuals willing to put in the effort. Anybody who struggles with being frugal and needs a higher income to maintain their expensive lifestyle.
In the business world, differentiation is the strategy of finding a way to be different from the competition by offering something customers might be missing currently. If a business can do this, there is usually a large market waiting to jump on board.
An example of this would have been when Apple released the iPod back in the day. This was something completely new that wasn’t currently available on the market. They completely obliterated traditional music players and succeeded as a result of simply offering something slightly different from their competitors.
From a personal finance perspective, this strategy would work by finding different ways of reducing costs or increasing incomes outside of the conventional norm. Some people are willing to move to cheaper parts of the world, like SE Asia, to reduce their costs to abnormally low levels. Others might live at home with their parents until their mid-30’s. I’ve seen some stories of people who worked 7 days a week, 12 hours a day for several years just to pay off their mortgage as fast as possible. The possibilities for differentiation are unlimited.
Pro: Can achieve drastic results without needing conventional skills, experience or education.
Con: Usually involves drastic lifestyle changes that most people aren’t suited to.
Who Does This Suit? Typically unconventional people who don’t mind thinking outside of the box and putting in a lot of effort. Creative thinkers who don’t mind going to extremes to reach their target.
Blue Ocean Strategy
Most people will probably fall into one of the three strategies above, but a blue ocean strategy is one which combines various strategies, potentially even falling into all of the above.
In the business world a blue ocean strategy is one in which a business aims to realise low costs, high quality and differentiation. It’s very rare for a business to actually achieve this strategy as usually there will be other competitors impacting their ability to do so. That being said, there are examples of this strategy at work, one being the Cirque du Soleil. They took a traditional circus act, removed the animals (cutting costs & increasing customer satisfaction) and offered high quality, skilled performances that nobody else was doing. Traditional circuses have all but died out ever since.
From a personal finance perspective, this strategy would be a high earning individual who lives frugally and, has the ability to work remotely in an extremely cheap country. They are combining every possible strategy into one and usually the results are pretty astonishing.
Pro: Unbelievable savings rate, can probably retire in just a few years feasibly.
Con: Typically difficult to achieve, requiring a high paying job and frugal lifestyle.
Who Does It Suit? This is a rare breed for sure. It would take a person who has a high paying job but a low desire for consumerism. They would also have to think outside the box to maximize income. Essentially, this is what every financially independent person should aspire to be!
Overall, in my opinion, everybody should be practicing cost leadership if they are aiming for financial independence. This is something anybody can do immediately without a lot of effort and without any skill required. It’s also a lifelong skill that continues to pay you even when you quit your job. This is likely why most blogs focus on this area.
Next, income leadership is important too, as maximizing your income will likely shave more years off your retirement date than cutting costs alone. Whilst income leadership may not benefit you as much as cost leadership after retirement, it helps get you there considerably faster.
If you think you can use differentiation to achieve your goals, be my guest. It’s not an approach I’d be inclined to undertake as I’m a pretty conventional person.
The ultimate goal is the blue ocean. This will take a while achieve but if you focus heavily on cost leadership, then income leadership, you should ultimately get to the blue ocean. Even if you don’t make it, you’ll be in a far better off position than by not trying at all.