As some of you know, I’ve long been an admirer of Keller Williams as a brokerage model, because of its consistency. I may not be a huge fan of all of their practices, but as a business consultant, I’ve always admired how its strategy fits together so very well. I wrote about KW on Inman last year (subscription required) as I held them up as a classic case of cost leadership.
Recently, however, I’m left wondering what KW is doing with some of its moves. The most recent move, the announcement of a program called E-Edge, has me scratching my head. I thought it worth writing about, because I think it illustrates a core concept in competitive strategy: strategic fit.
Brief Review of Competitive Analysis
Basically, Porter posits that there are three ways a business competes: price leadership, differentiation, or focus. Focus in turn is broken down into price-focus, and differentiation-focus. Price leadership means that you will offer an acceptable level of product or service, but at the lowest cost in the market. Think Wal-Mart, or maybe Dell.
In real estate, my position was that the cost-leader was Keller Williams, if you consider a brokerage’s true customers to be not consumers but the agents. The combination of offers — a cap on commissions, passive income, minimal services — meant that for productive agents, Keller Williams was offering an acceptable level of service in exchange for the lowest cost. (This was in contrast to some of the “100% shops” that offered a lower cost, but an unacceptably low level of service in exchange.) As I wrote in the Inman column:
As we will see, the KWRI model – of which KW Premier is an example – is built around achieving and maintaining Cost Leadership, while offering a product to the general agent population that is comparable to that offered by competing brokerages. Almost all of its systems are inter-related, and that system is what provides it with the competitive advantage of Cost. (Emphasis added)
Everything in the Keller Williams system, as I understand it, is built around the cost leadership vector of competition. For example, the profit-sharing up to seven levels of down-line revenues incentivized the agents themselves to recruit new agents into Keller Williams, minimizing the need for costly recruiting and retention efforts. The freedom that Keller Williams emphasized in all of its literature and marketing to agents also meant that the average brokerage (or “market center”) did not have to provide costly technology tools and the like. Each agent was free to buy and use whatever she deemed fit.
Because its whole system fit together so well to create a cost leadership competitive advantage to KW, I figured it was just a matter of time before KW overtook the existing leaders. Indeed, apparently, KW just surpassed Century 21 to become the second largest real estate franchise in the United States. Just last year, KW passed RE/MAX as the #3. That’s extraordinary growth.
Since I’m not a KW agent, I’m going by public information on E-Edge. From KW itself we get this description:
KW eEdge is the real estate industry’s first and only COMPLETE lead-to-close agent business solution -available exclusively to Keller Williams associates. It includes lead management and routing capabilities, full contact management, a professional marketing library and a true paperless transaction system.
And here’s a video going into a bit more depth:
The stated intention of E-Edge is to take all of the different, various tools that a KW agent uses and bring them all into one single tool. You’ve got (from what I can tell from a quick overview) lead generation, syndication, lead management, CRM, transaction management, paperless transactions (DocuSign), transaction reporting, financial reporting, and so on. It sounds fantastic.
(Of course, if I were TopProducer or MyRedTools, both of whom are KW partners/vendors, I’d be pretty pissed off about getting called out by name as being too expensive… but that’s between those companies to figure out.)
I have no idea if E-Edge actually is fantastic or not. Early word is that it’s not, but… I suppose that’s to be expected from any massive deployment of any large-scale software solution. At the same time, KW and its vendor partners can’t be happy about things like this:
But even after KW overcomes whatever launch bugs and such, I still wonder about E-Edge from a strategic standpoint, because of two particular aspects of the program: mandatory usage, and mandatory fees.
According to KW agents, usage of the E-Edge system is not yet mandatory, but will be, as it will become the only way to submit transactions to the brokerage. Furthermore, KW itself says that E-Edge is being funded by a $15 per agent monthly technology fee. Looking through the comments on the Internet (for example, here), it appears that a number of complaints are stemming from the fact that some people aren’t happy with what $14.4m per year (80,000 agents x $15 fee x 12) is buying them. [EDITED to correct wrong pricing info, as per Eric Stegemann’s comment below.]
If the usage and the fee are both mandatory, then KW has taken a step away from its hitherto consistent cost leadership strategy. E-Edge does not fit the KW model as I understood it to be.
Which means that either E-Edge will fail miserably, that KW has lost sight of its competitive strategy, or that KW has changed its competitive strategy. If the first, that’s a misfortune for KW, but not a big deal. If the second, a window of opportunity has been opened. If the third… well, then it gets interesting.
The Strategic Fit
I feel E-Edge is a turning point of sorts for KW, because of strategic fit. It is a glaring exception to the overall cost leadership strategy that the KW system has built.
To review, once again, I believe that the KW system was built on offering a minimum acceptable set of services in exchange for an extremely low price (in the form of splits) to the agent-buyer. Consider some of the major features of the KW system:
- 70/30 splits, up to a cap (typically $30K or so), after which the agent goes to a 100% split
- A cap on royalties to Keller Williams Realty International, the franchisor
- A fairly complex profit-sharing scheme in which an agent can receive passive income (“downline revenues”) from agents that she has recruited into Keller Williams (This is the so-called “multi-level marketing” that gets such scrutiny from others.)
- Free training offered by other agents within an office, who are motivated via profit-sharing, and paid training offered through Keller Williams University and other channels (and KWRI considers itself a “training and education company, that happens to run a real estate brokerage”)
- Almost complete independence on how an agent can run her business, coupled to a near-total lack of tools and support from the brokerage or from Corporate.
- Near-zero marketing of the brand or the company; all advertising efforts are focused on the individual agent, but paid for by the individual agent
- Very little recruiting, compared to other major franchisors
The end result, as I wrote in my Inman column, is a system which provides cost leadership to KW companies:
The reason is that all of KW Premier’s activities fit together to create that cost advantage. It isn’t simply that KW Premier offers high splits. Its training program by itself is not an obvious cost advantage. The lack of expensive office space is not the cost advantage, nor is the low staff count, nor the lack of a truly robust technology offering. What KW Premier achieves is a totality of all of those factors working together to create the cost advantage: making the agent all-important leads to flexibility, which leads to not having to manage agents tightly, which leads to focusing on training, which leads to agents who don’t need as much handholding, which leads to low staff count, which leads to not needing expensive office space, and so on. Combining profit sharing based on recruiting, and the financial performance of the firm, reduces recruiting cost, and incentivizes experienced agents to share best practices with less experienced agents, which reduces training costs. And so on. The entire system provides Cost Leadership. (Emphasis added)
Because of the strategic fit among the various elements, I believed that it would be nearly impossible to attack the KW model from a cost standpoint. A competitor would have to employ some sort of a Differentiation or a Focus strategy.
E-Edge represents a real step away from this system. It is a mandatory, company-wide offering, paid for by mandatory fees charged to each and every agent. And it is a truly robust technology offering, which aims to consolidate in a single platform all of the various tools that a real estate agent uses day in and day out, from lead generation to lead management to marketing to transaction management to document management to financial reporting. It is an ambitious project.
The trouble is, the offering simply lacks strategic fit. Already, the additional $15/person technology fee, needed to pay for this institutional technology offering, reduces KW’s cost leadership advantage. And in this economy, in this market, an additional $180 in costs per year is actually not something to overlook. The agents who have built their own technology systems, incurring out of pocket costs, will now have to consider switching (which imposes costs) or somehow integrating their systems with the E-Edge system (which imposes costs). It is not at all obvious that integration could be done.
Usage of E-Edge is also mandatory. (People I’ve spoken with say that it isn’t clear whether usage is mandatory or not, but they expect that it will become mandatory in due time if it is not.) This goes against the overall strategic fit, in which agent freedom is the principle that allows KW to skip on training and enforcement costs. With mandatory usage comes mandatory training, and either (a) KW Corporate will need to incur those costs itself, or (b) agents will be forced to pay for training they must go through. Either way, Cost Leadership will be more difficult to maintain.
It may be that when it’s all said and done, E-Edge will become a wonderful tool that raises agent productivity for KW across the board, and allows KW to recruit even more agents into the fold. KW may become the largest real estate brand by 2012. And the leadership at KW may know something about the limits of the cost leadership model in real estate that I do not. (For example, perhaps they see internal numbers showing recruiting has stalled, because KW does not offer a robust technology platform.)
So this analysis is not, repeat NOT, a knock on KW’s decision. What it is, however, is a look at the initiative from a strategic standpoint. And I’m not sanguine about E-Edge or KW from that perspective.
Simply put, the existence of E-Edge now provides an entree for the Differentiation competitors. Prior to E-Edge, a KW broker (or in its system, one of its agents who wants a downline recruit) would never compete on the basis of its technology platform. Some competitor might tout its “integrated technology platform”, but KW would simply ignore the issue and focus on its systemic strength: cost. Now, at the very least, a KW broker has to have a conversation with an agent-buyer about its integrated technology platform, instead of keeping the agent-buyer’s mind focused on the strength of KW’s proposition (cost). Perhaps KW will find that its technology is superior to everyone else’s, and win more agent-buyers that way. But KW has opened the door for a competitor to come along and offer an even better solution, which it is better positioned to do because it charges more to the agent-buyer.
Unless there has been a change in KW’s competitive strategy, straying from the core competitive system will often prove disappointing. And if there has been a change in the strategy, there are real questions as to whether a tiger can indeed change its stripes.
Considering Initiatives Within a Strategic Context
Fact is, companies and organizations make similar mistakes all the time. They take on initiatives that sound fantastic — in fact, they are fantastic. But those initiatives lack fit with the rest of the company’s competitive strategy.
Such initiatives end in three ways:
- The initiative fails
- The competitive strategy gets corrupted
- The competitive strategy changes for the better
Of these, only one can be considered a positive, and #3 rarely “just happens”. Usually, changes in strategy are effective only when driven from the top, throughout the organization, in a painful, laborious process in order to adapt to new market conditions. And even then, it doesn’t always work, because competitors are better positioned to take advantage. Look, for example, at Microsoft’s attempts to put the Internet at its center since 2005 after Bill Gates issued his now-famous “The Internet Tidal Wave” memo. Then consider whether Microsoft really is a major player on the Internet, given Google, Facebook, Amazon, and the like.
Of course, it must be said, as it comes to our industry… before one can stray from a competitive strategy, or get it corrupted, or get it changed… one has to have a competitive strategy. Sadly, this is not a given in our industry. But one guy can only do so much. 🙂
Time Will Tell
Again, I know very little about E-Edge itself, the thought process that went into its deployment, and cannot speculate on its ultimate success of failure. Given the thus-far demonstrated competence of the team at KW, it may be that this is a conscious first step to change the competitive strategy, and the KW executives likely know far more than I do as to what they’re trying to do. Time will tell whether E-Edge was the start of something new and fantastic, or the end of something compelling and competitive.
But the E-Edge initiative does serve as a wonderful example of how specific initiatives do or do not fit within a competitive strategy, and for that alone, it is worth looking at in more depth.
Your comments, as always, are welcome.