Understanding Your Value-creation Advantage
By Robert W. Bradford
In the course of teaching our strategy courses, we encounter far too many companies that fail to focus on one source of value as their competitive advantage. Ask an executive from such a company what his competitive advantage is and you will likely get an answer that sounds like this: "Our company offers high quality products with great service at a competitive price". Usually, when pushed to identify what truly distinguishes such a company from competitors, we find that the company is one of the three to five top players in their industry - but has no significant competitive advantage over the other top players.
This is a frustrating position, strategically. These "good but not great" companies are doing everything pretty well - but are unremarkable. It's not unusual to find industries where all of the top players are like this, and all are also struggling to turn a profit! In such a situation, the competitive game tends to devolve into either a sales competition, where each competitor pushes their sales teams to win on the strength of sales talent alone, or worse, a price war, as failure to differentiate inevitably leads to commoditization of the entire industry.
For many American and European industries, this scenario has been playing for a few years. Recently, however, the rise of ever more sophisticated Asian sources of competition has driven the price war to the front lines of many of these industries. This is especially true of very mature industries, but also, in the case of electronics manufacturing, industries are maturing faster than we might have predicted as a result of Asian outsourcing.
Strangely, many companies have elected to play the commoditization game. This is strange because, in many instances, the commodity play is only one of many ways to establish a profitable foothold in a market. Indeed, since there can be only one commodity winner (the cheapest), allowing cheap competitors to define the playing field as a price game is tantamount to suicide for many non-Asian companies. Most of us would be far better off coming to a better understanding of our true value-creation advantages. This understanding can enable us to define a playing field which, while not always market-dominating, will afford us a profitable niche from which to build future success.
The first step in discovering your value-creation advantages is to conduct an objective review of the customers' decision making processes. This is best done by strategic market segment, but can be done for the entire customer base as well. Our main aim in this review is to find out how many different reasons a customer might have for choosing one competitor over another. Here are the ones we most commonly encounter:
As a general rule, it's very difficult to establish clear advantage over competitors in any of these areas, especially in a mature market. Typically, the companies that clearly outperform their competitors in one of these basic preferences do so by giving up performance in one or more of the others. For example, Midwest Express airlines offer the product feature of larger seats throughout the cabin on their jet flights by giving up the advantage of lower prices. This trade-off is much more important than most managers want to admit - the reality is there are precious few companies that have succeeded in distinguishing themselves in any market without accepting the hard truth behind it.
To assess your own value-creation advantage, we recommend you conduct an exercise similar to the competitive assessment matrix we use on page 4.2 Competition Assumptions of the Simplified Strategic Planning workbook. Start by assigning an "OK" to yourselves and your four or five toughest competitors for each of the sources of advantage listed above. Then ask yourself if there is a good reason why each company might be considered significantly better than the other competitors ("+") or significantly worse ("-"). You should end up with a table that looks a bit like the one below.
Clearly, if you find there is one area where you are superior to your competitors, it will be easier to dominate there. This might lead you to, for example, focus your marketing on reaching customers who respond favorably to this advantage. One of the most important things to remember about this is that you should be very careful about sacrificing this advantage just to bring yourself to an "OK" in one of the other areas. While this seems obvious on the surface, most of us can easily think of companies that did just that. For example, Delta Airlines, which was once a preferred airline for many travelers at least in part because of their excellent employee relations, sacrificed that advantage in pursuit of cost savings when they were trying to match the fares of the discount airlines. Today, most of that preference - which was strong among business travelers, who are much less price sensitive - has vanished and Delta still has trouble matching the ultra-low fares of Southwest Airlines.
In addition to this table, you may find it useful to list any unusual differentiators under each competitor's column in the table. For example, if one of the key players scores points with their customers by having a significantly better website than their competitors, make a note of it. Some of these differentiators may seem small, but they can - especially in a mature market - be enough to tip a significant portion of the customer base over into preferring that competitor. For example, National Car Rental's Emerald Aisle program, which allows frequent renters the benefit of choosing their own vehicle from the lot instead of taking an assigned rental car, has garnered them a substantial fan base among frequent travelers. In a highly competitive market, where price is sometimes seen as the only differentiator, this loyal group of customers is worth its weight in gold. Clearly, if you can create a unique differentiator that resonates with a strategically useful group of customers, you should.
In our next article on this subject, we will examine a few common patterns found in this value-creation assessment and discuss useful strategic responses to them.
Robert Bradford is President of Center for Simplified Strategic Planning, Inc. He can be reached via e-mail at
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