The Next Step - Competitive Advantage

So, we've been discussing the importance of creating customer value and how a value proposition is the essence of any business. We've talked about how to choose a value proposition and the importance of choosing specific components of value. During the next several posts we'll spend time highlighting how to build competitive advantage in your business/unit, and how it relates to strategy and strategic planning.

Competitive Advantage Diagram

Click here to access the beginning of this blog: http://mybilliondollarfruit-stand.blogspot.com/2006/11/introduction-to-fruitstand-concept.html

On The Verge

In my previous post that introduces Marco's fruit stand, we identify that he has chosen a very specific value proposition and strategy. Marco provides his customers with the "best-tasting fruit." He has invested time and resources in creating business activities and processes that deliver his value proposition to the customer. At the same time he knows the importance of delivering other components of value reasonably and adequately. We call this the Verge. Marco doesn't differentiate his fruit stand from Ray by delivering vast selection, low price, or even convenience. However, he knows that if he doesn't meet basic standards and expectations in these components that his customers will cease from coming. The art of a successful business and successful management is understanding how to differentiate the product or service while maintaining these basic standards. The management team at Apple knows that it's products are differentiated by its cutting-edge and innovative image. However, they also know that "verge" standards must also be met in the pricing area or demand will vanish.

As you take your business through the strategic planning process you must ensure that you differentiate your product or service without ignoring other non-core types of customer value.

(Start at the beginning) http://mybilliondollarfruit-stand.blogspot.com/2006/11/introduction-to-fruitstand-concept.html

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Default Customer Value (AKA..."we suck less")

We've covered the three primary ways in which organizations can create value for customers. These groups have been discussed to great extent by several well-known and respected authors such as Micheal Treacy, Michael Porter, and Geoffrey Moore. We're not breaking new ground here. However, we have added a fourth value strategy or value proposition. This can easily be categorized as an organization's "default" strategy. I refer to this strategy as the "we suck less" position. Essentially, any organization that creates a strategy without customer value as the central focus is planning for certain mediocrity. Firms that don't position their entire operating model around a clear and specific value proposition are sure to wind up competing on price. These organizations are basically saying, although most certainly not out loud, that we just attemp to "suck less" than our closest competition. If we are not as bad as our competitor and our price is lower then we win the business.

If you've read previous posts then you know that our fruitstand owner, Ray, has adopted an "all things to all people" strategy. We quickly categorize this strategy as no strategy at all. Where is the squirrel-like focus? Ray, without being aware, has adopted the "we suck less" strategy.

Examples of Best Product/Service Organizations

Here are a couple of examples that highlight my previous post about organizations that choose to compete by offering their customers the best product or service in their market. My favorite example, which I have posted about before, is Starbucks. Yes, their stock price has dropped significantly over the past year. However, they will continue to lead the marketplace over the long range by delivering a superior experience (aka - Best Product). They are investing in new high-end espresso machines for their stores that are designed to create the best coffee drinks available. They have also intensified their focus on Fair Trade coffees in Africa that produce the best coffee beans...period.

Another example is Apple. Need I say more? They dominate their space by constantly innovating and producing the latest and greatest tech gadgets and computers.

Both of these examples provide a classic look at organizations that choose to differentiate by offering the Best Product/Service.

Choosing how you create value for your customers drives your entire strategy and strategic planning process.

Click here to start at the beginning of this blog.

Best Product or Service

In our previous posts, we have outlined how choosing specific and compatible components of value to deliver to chosen customers is an important first step in strategy development. Certain components of value, when combined, tend to compliment each other to form a more complete offering that will draw customers. As mentioned in the book The Discipline of Market Leaders, the authors highlight three main categories that will make it easier to choose a value proposition during the strategic planning process. We have already explored the Lowest Total Cost and Best Total Solution categories, and in the next several posts we will dig into the Best Product or Service. (The diagram shows some of the possible components of value associated with this category)

Quick Tip

Before posting about the third value proposition, Best Product or Service, I would like to address a question I have been received lately with regards to analyzing the competition. The essence of the question is this; what's a good way to figure out my competition's value proposition so I can effectively position my organization to beat them?

Here's a quick tip: if your compititor is a publicly traded company then a very effective way to analyze their strategy is to listen to their quarterly earnings calls. You can access these calls on most company websites under a link called “Investor Relations,” or something similar. Every quarter you can listen to the company’s CEO discuss their performance, strategy, budgets, and overall outlook on the market. You can gain a vast amount of knowledge this way.

Best Total Solution Real World Examples

Here are some examples of organizations that excel at delivering personalization, customization, and tailored solutions through a business model that builds lasting relationships with select customers. Home Depot is a classic example, as they will walk you through the store educating you and helping you find the product you need. "You can do it...we can help." Also, Herbalife is a great example of how an organization uses a customer intimate approach to encourage and support its distributors to build their individual business.

We, at Start-Up Smart, just worked with a sales team for a market-leading book publisher. They identified themselves as a Best Total Solution organization. This value proposition differentiates them clearly in the industry, as the trend for their competitors is to outsource the sales function. Outsourcing is clearly a low-cost strategy and it removes the customer intimacy. This sales team now has a clear differentiating value proposition.

Here is an excellent link to a blog about the Best Total Solution. http://deoluakinyemi.com/2006/09/22/customer-intimacy/

Best Total Solution

In our previous posts, we have outlined how choosing specific and compatible components of value to deliver to chosen customers is an important first step in strategy development. Certain components of value, when combined, tend to compliment each other to form a more complete offering that will draw customers. As mentioned in the book The Discipline of Market Leaders, the authors highlight three main categories that will make it easier to choose a value proposition during the strategic planning process. We have already explored the Lowest Total Cost category, and in the next several posts we will dig into the Best Total Solution. (The diagram shows some of the possible components of value associated with this category)

Lowest Total Cost - Real World Examples

Here are some examples of the Lowest Total Cost strategy from my previous post:

Dunkin Donuts (see an earlier post for a complete article outlining their business model). They compete by targeting a specific customer that is looking for good coffee at a low price, delivered fast and conveniently. Their operations are set up differently than other higher-end coffee shops.

Obviously, Wal-mart is an example as they excel at delivering speed, convenience, and low price rolled up in a no-frills shopping experience.

Ikea is another example. They deliver specific components of value such as low price, wide selection, and convenience. A customer can furnish their entire home in this store at a low price, late in the evening , and while putting their kids in the in-store child care facility.

A slightly older example but still a good one is Southwest Airlines. They deliver a no-frills, low-cost, and on-time travel experience.

All of these examples show the importance of differentiating by delivering specific components of value through a focused operating model. Each one focuses on performing internal activities that deliver the Lowest Total Cost value proposition to a chosen and specific customer group.

Lowest Total Cost

We have been discussing the need for businesses to focus on differentiating by delivering specific components of value to a chosen customer group. Certain components of value, when combined, tend to compliment each other to form a more complete offering that will entice customers. In the book, The Discipline of Market Leaders, the authors highlight three main categories that will make it easier to choose a value proposition during the strategic planning process. The first one is referred to as Lowest Total Cost. (The diagram shows some of the possible components of value associated with this category)

Take a Shower!

In Geoffrey Moore's book, Living on the Fault Line, he discusses value propositions and how they lead to sustainable competitive advantage. Geoffrey talks about delivering certain components of value (see previous posts for a description of "components of value") in a superior way and the other components in a reasonable and adequate way. In other words, if you are going to differentiate on convenience, speed, and hassle-free service, then you still have to deliver innovation, cutting-edge performance, and customization reasonably and adequately.

Marco differentiates his fruit stand by providing the best-tasting organic fruits (product leadership) through cutting-edge agriculture and farming methods. However, he also knows that he must deliver on price, selection, and speedy service in ways that will meet the basic standards of the customer. In other words, he must deliver on those non-differentiating components of value reasonably and adequately.

Geoffrey Moore defines these non-core components of value as "hygiene." Essentially, most of us take a shower every day, but we don't get extra credit for it. We must have "reasonable and adequate" hygiene to wander around in society, but nobody pats our backs for it. This is the same with customer value creation. Organizations must deliver two or three components of value in a way that makes them stand out and only maintain "hygiene" standards in the remaining components of value creation.

This can be challenging in the strategic planning process as entrepreneurs and executive teams struggle to keep their decision-making and operational planning aligned with the chosen value proposition.

The Essence of Strategy

The essence of strategy lies in choosing what NOT to do. If you haven't read my previous post about Dunkin Donuts , then I suggest taking a few minutes to access the article. You will see that Dunkin Donuts has chosen to perform certain activities well and leave other ones out of their focus. They are shooting for a coffee drinker that appreciates no frills, fast service, price, and convenience as opposed to the high-end coffee experience that Starbucks delivers. They have chosen a different customer group and a different value proposition, thereby eliminating direct competition with Starbucks and creating competitive advantage.

During his strategic planning process, Marco has chosen a specific value proposition around delivering the best tasting organic fruits available. As we explore his operating model in upcoming posts, we will see that he chooses to perform certain activities that deliver unmatched value for his chosen customer group. He doesn't muddy his position by performing "best practice" activities that fail to support his value proposition. In selecting his value proposition, he first identified a customer group that was under-served and then began to select components of value that his customer desired.

In the next few posts we will explore how to combine components of value that we outlined in earlier posts. This combination will help to clarify a specific value proposition.

Dunkin Donuts

Regarding the concepts discussed so far in my blog, don't take my word for it. As you can probably tell, I will use examples pulled from real companies to support the fruit stand concepts. Here is a link to an excellent article from New York Magazine. The article highlights a clear value proposition created by Dunkin Donuts. You will see the different customer value they are targeting.

http://nymag.com/nymetro/news/bizfinance/biz/features/15139/

All Things to All People

"All things to all people" is not a new statement by any stretch. There is nothing groundbreaking about it. However, this concept seems to take over business strategy and is the enemy to success.

Ray, our second fruit stand owner, seems to have put together a solid business. He focuses on many good things, and at a glance we are tempted to agree he is on the right track. However, if you look at the components of value we outlined in our previous posting, you will see he is spreading his approach too thin. He is attempting to try to deliver differentiated value in multiple areas such as low price, product leadership, intimate service, etc. This is a losing game that will result in a net loss business model.

Redesign your business to deliver focused value to select customers.

Why is the Value Proposition so Important

Why is a Value Proposition considered STEP ONE in strategic planning? Our take is simple. How well an organization creates value for a chosen customer is the number one reason for bottom-line success. A value proposition is NOT a marketing term. It is not something the biz dev, marketing, and sales guys/gals should be exclusively in charge of. The value proposition surpasses everything else inside the firm as the single most important element to driving shareholder value. Without this crucial element in place, how can the customer be expected to select your offering over others? Without this crucial element in place, how can your employees possibly know how to execute?

A value proposition shapes decisions that managers make: budgets, channels, and corporate culture. Executive teams spend weeks discussing the mission and vision of the company without touching on the most vital of all elements. Why? Our experience has shown that customer value propositions become marketing ploys. They change constantly any time a competitor does something new. Also, executive managers don't understand the value proposition concept as a key step in strategic planning. Many managers will put in place an operating initiative such as reengineering or Six Sigma and believe those concepts will create a sustainable advantage. The only sustainable advantage is decided by the customer. Market leaders don't change their fundamental customer value. They continue to improve it.

Choose Your Customer

In order to hone your value proposition and choose different components of value, you will need to clearly identify who your customer is. As we discovered with Marco's fruit stand, he has chosen a customer who is willing to pay (a little bit) more for the "best tasting fruit" in the area. When starting his fruit stand, he identified a customer demographic that preferred high-end organic fruit. This customer would drive past several other fruit stands to fill their need for the best tasting and nutrient-rich fruit. This customer looks for shops that constantly innovate and offer the latest and greatest products.

Marco excels and differentiates from the other fruit stands through his rigorous approach to delivering the best product...period. Marco knew he had a customer that would love this value proposition. He says, "Customers who are looking for a low price or lots of selection don't come here. They go down the street, and that is fine with me."

CHOOSE YOUR CUSTOMER

Honing the Value Proposition

In most of our strategy workshops, when we ask if businesses can be great at all of those components of value, we get a number of responses. We usually hear several answers that suggest you have to try to be great at all of them, and sometimes we hear answers that suggest lumping several of them together to focus on. The answer that we're looking for is the latter one. However, you have to be careful about which components you select to focus on. Some of the components, when you analyze them, are impossible to deliver together in a way that differentiates. In other words, it is very difficult to be great at offering a low price and delivering customization at the same time. Customization requires internal resources that cost money. This additional cost creates value for the customer that should be reflected in the price.

Of the components of value listed below, which ones might you be able to combine to offer to your customer in a differentiated way? In other words, which ones can you excel at?

Image
Time (Speed or Time Saved)
Price
Relationships
Performance
Convenience
Specific Solutions
Results
Hassle-Free Service
Ease-of-Use
Customization
Quality

Components of Value

As a part of STEP ONE, it is a good idea to separate many of the possible ways to create customer value. These can be referred to as components of value. Here are a few to consider:

Image
Time (Speed or Time Saved)
Price
Relationships
Performance
Convenience
Specific Solutions
Results
Hassle-Free Service
Ease-of-Use
Customization
Quality

Can a business be great at all of these? Can a business differentiate in all of these areas?

Before You Do Anything!

Before you do anything else inside your organization, define specifically, clearly, and with a rigorous approach your firm's value proposition.

This is STEP ONE in strategic planning. If you are working on a strategy and haven't completed this vital step, then you are setting yourself up for mediocrity. Yes, mediocrity. I wouldn't say failure, but to most shareholders, mediocrity is considered failure.

The first step in STEP ONE is to do some looking around. For example, look at your favorite websites, visit your favorite places to eat, and research market leaders in other industries. Look at how they create value and hone in on who their target customer is. Then look at how they are set up to deliver that value. Zappos.com, a leading online shoe store, creates value by offering low-priced shoes, huge selection, and hassle-free service. Their operating model is set up to deliver those "components of value" in a way that could be classified as excellent.

Anybody care to guess what STEP TWO is?

Chipolte

Have you ever had a burrito from Chipotle? This food chain is quite astonishing. They have taken the fast-food concept to new standards, and their shareholders are reaping the benefits. Like Starbucks, Steve Ells, the founder of Chipotle, has created a superior experience. The company's "Food with Integrity" philosophy is a truly disciplined approach in the space. They're obviously differentiating on the Best Product value proposition. They deliver the best ingredients and have focused their operations on ensuring they stay ahead of the game with regards to what they put into their foods. Additionally, they deliver on other components of value, such as speed and price, reasonably and adequately.

Steve Ells was recently interviewed on CNBC. He stated the success of the business is due to their focus on superior ingredients, a focused menu, and a casual dining experience. They don't get caught up in the next new menu innovation but rather focus their R&D on working with suppliers to improve the food quality and taste. They stick to their squirrel-like focus and constantly improve upon it.

Incidentally, the stock is up over 50% in 6 months. You could have bought it last October for $48 per share, and today it's topping $120 per share.