Strategic Positioning & Competitive Advantage

I learnt about the Customer Value Performance Matrix from reading Customer Power by David Swaddling and Charles Miller which they called the Customer Perceived Value Performance Matrix.

It is another 2 x 2 matrix – like the Innovator’s Portfolio Matrix – that I find myself wondering “why didn’t I think of this?”

The Customer Value Performance Matrix

The customer value performance matrix lets you look at your individual customer value attributes and convert them into a SWOT analysis by identifying the strengths, weaknesses, opportunities and threats.

The two axis are:

• Relative performance which identifies good and bad attributes.
• Relative importance from the customer’s perspective.

According to Swaddling and Miler you can calculate your relative performance of each attribute based on the customer’s next best alternative. This may be difficult to determine since it requires you to crunch through the customer value numbers to determine which is the best alternative (see Managing Customer Value).

Alternative ways would be to

• Average the attributes across your main competitors and compare your performance against the average. This risks over-assessing your strengths and opportunities if there is one outstanding competitor who has a clear advantage, but if that’s the case, you can use that competitor as your benchmark in the customer value performance matrix.
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• Picking the best customer value attribute performance from all the competitors which would be a tough test.

On the other axis, Relative Importance, Swaddling & Miller draw the cut-off line at 12.5%. I believe this depends on how many attributes you track in your customer value formula. If you’ve got five attributes then the dividing line would be 20% with a possible sample of importance ratings of 35%, 25%, 15%, 15% and 10%. If you’ve got eight in your customer value formula, then the 12.5% is appropriate.

SWOT From The Customer Value Performance Matrix

Strengths – high relative performance (i.e. you’re better than your competitors) but low relative importance. The customer value strategy would be to maintain performance.

Weaknesses – low relative performance and importance are low priority improvement targets unless they are order qualifiers and performance is below the threshold or risks falling below it.

Opportunities – high relative performance and importance – these are the competitive advantages of the business, the key factors of difference.

Threats – low relative performance but high relative importance – these attributes are priorities to the customer but the company does not perform as well as competitors. These are priorities to improve the underlying capabilities.

Putting Customer Value Into Perspective

Customer value can seem a complex, intangible concept when you start working with it but techniques like the Customer Value Performance Matrix help to make it much more relevant to sceptical management since it guides priorities and decisions.

When I was reading Business Innovation For Dummies by Alexander Hiam, I came across the Innovator’s Portfolio Matrix.

I think it’s a powerful way to think about differentiation in your product mix.

What Is The Innovator’s Portfolio Matrix?

It is a 2 x 2 matrix (much loved by strategy consultants of course) with uniqueness on one axis and profitability on the other.

Profitability is measured through the margins you achieve but it’s up to you to decide what’s a high and what’s a low margin in your business or industry. There can be a long debate on the right margin information to use but I favour contribution margin (after variable production and sales costs) and all other directly attributable costs which would disappear if the product was taken away. This would therefore include advertising costs for the product and any special promotional deals with customers.

Uniqueness is an assessment of how your product compares to its close competitors. If it’s a commodity with all competitors selling the same basic item, then unique is very low. If it is totally only supplied by you, then your uniqueness is high. The best assessment of uniqueness is from your customers and non-customers in the market but that means a market survey. You can make your own assessment provided you try to look through your customer’s eyes.

The Four Cells

The four cells in the product portfolio matrix are:

• Develop – high uniqueness, low profitability
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• Maximise – high uniqueness, high profitability
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• Update – low uniqueness, high profitability
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• Eliminate – low uniqueness, low profitability

When a new product concept is brought to market it is unique but no one knows about it or understands its advantages. While selling prices are high, production costs may also be high because there’s been little benefit from accumulated learning and there’s a big marketing job to be done to educate the market.

If things go well, the product moves out of the Develop stage to the Maximise stage where profits are high and uniqueness is maintained.

Unfortunately success attracts imitators who will also have high costs at this stage and will want to shelter under your price umbrella. Profitability can stay high in the short term but to maintain it, the uniqueness needs to be renewed through additional product innovation.

If it isn’t normal competitive forces will mean that the product is commoditised and prices and margins are competed away in the scramble to win volume from customers who know they only need to focus on price comparisons rather than a more complicated value assessment.

How Do Your Products Fit In The Innovator’s Product Portfolio Matrix?

The logic of the Matrix is clear but it’s power to help you to think through your strategic issues only really becomes apparent if you plot your products into the matrix.

It can help you to add in elements into your SWOT Analysis:

• Products in the Maximise cell represent both a strength and a current opportunity.
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• New products in the Develop cell represent an opportunity that is worth pursuing.
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• Older products in the Develop cell could be an opportunity or a weakness – while the product is uniqueness, that uniqueness doesn’t appear to support a price premium. This may be because the uniqueness isn’t appreciated by the market (the weakness) or it might be because you are under-pricing.
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• Products in the Update cell are a threat – while profitability is currently good, unless you do something to restore the differentiation, you can expect prices and margins to fall sharply as customers exert their buying power in negotiations.

What Do You Think Of The Innovator’s Portfolio Matrix

I’m kicking myself that I hadn’t thought of this 2×2 matrix because it is such a neat way to summarise the differentiation issues within a business.

I like it but I’d like to know what you think of this Matrix so please leave me a comment.

In the classic book, Competitive Advantage, strategy guru Michael Porter introduced the value chain in a stylised diagram based on a manufacturing business but many people overlook the idea of a consumer value chain.

The Consumer Value Chain

A business performs many activities to create its own products or services which it intends to sell to make a profit. The traditional value chain is a way for the strategist to look at the business to see how activities can be improved to:

• Reduce the costs of the necessary activities; or
• Improve the performance of the activities in ways that create extra value for the customer, differentiate the business and encourage the customer to pay a higher price for the products and services on offer.

The key to improving performance in ways that customers value can be found by examining the customer’s own value chain to find ways that it can:

• Reduce costs for the buyer
• Improve the buyer’s own activities and products in ways that it can increase prices and/or sell more.

The traditional value chain provides a guide to this process when the business is selling business-to-business but it doesn’t provide much guidance when the business sells to consumers.

What Michael Porter Has To Say About The Consumer Value Chain

In his book Competitive Advantage, Michael Porter says the following about the consumer value chain:

“A consumer’s value chain represents the sequence of activities performed by a household and its various members in which the product or service fits. To understand how a product fits into a household value chain it is usually necessary to identify those activities in which a product is directly or indirectly involved, typically not all the activities a household performs…. a household’s value chain reflects its members’ habits and needs.” (pages 130 & 131)

Identifying The “Consumer”

If we are to think through what a consumer wants, we need to identify who is the consumer and how that may differ between the user of the product or service and the person who makes the buying decision and who makes the economic sacrifice of paying for the item. There is also the knock-on impact onto other members of the family or household.

A child plays with a toy but it may have been chosen and paid for by the child, a brother or sister, a parent, grandparent or someone else. The child gets the pleasure while the buyer gets pleasure from having a happy child or fills a social obligation.

If the present is a set of drums (or anything else that is irritating), then the child’s pleasure comes at a cost to other members of the household.

Sometimes one person will benefit from a purchase, other times everyone in the household will get benefits (e.g. a television).

The consumer for consideration in the consumer value chain is therefore a complicated concept which will depend on the product or service that is being sold but it will be a composite of:

• The user who gets benefit from the product
• The product selector – the person who makes the choice
• The person who incurs the cost of the product
• Others affected by the product in use.

The Goal Of The Consumer

It’s easy to assume that the goal of a business is to increase profit which can be achieved by selling more products at higher prices and with lower costs.

But what is the big goal of consumers and what are the main drivers to the achievement of that goal?

That’s a big question for philosophers but I’m going to try to keep it simple here.

I believe the main goal is “happiness”. I want to be happy and I want my family to be happy.

Money helps but it’s not the big goal. It’s more of an enabler which makes life easier and more comfortable.

We do certain things to acquire money to allow us to buy or do certain things.

It’s an input and an output of the process of living as a consumer.

The three big inputs are:

• Time
• Energy
• Money

The consumer value chain needs to take into account all three.

Time is fixed. One hour spent on one activity means an hour sacrificed elsewhere. Anything that saves time therefore creates value because it means we have more time to spend on other activities.

Energy is variable but comes at a cost. Expending a lot of energy on one activity means that less is available elsewhere although the relationship isn’t as clear and absolute as time. As people get used to exercise and spending energy, their bodies normally get fitter and they are able to do more. Sometimes expending more energy saves time, sometimes it doesn’t. Reducing effort and the energy required for an activity usually creates value for consumers – we want things to be easier.

One of the ways that consumers reduce the energy and effort is to satisfice. Instead of continuing to search for the best solution, they can take action when something satisfactory is presented. This also creates customer inertia where customers are not satisfied but continue to consume because of the perceived difficulty of changing.

Money is variable and as consumers we can earn more by either working more hours, finding ways to earn more per worked hour or leveraging our time to earn more. Saving money adds value because it means that more can be spent on other activities and products.

The Consumer Value Ownership Lifecycle

The consumer is involved with the product in different ways at different times in the ownership lifecycle:

• Selection and purchase
• Delivery, installation and making the product ready for use
• Use
• Disposal

Each stage offers opportunities to save time, energy and money which can be included in the consumer value chain.

How Do You Use The Consumer Value Chain?

How do you make decisions in your family about expenditure? Do you have some kind of trade off where everyone in your family has the chance for some treats or does one person dominate the spending of any spare cash?

What is the definition of strategy and how do various strategy definition compare?

There is a lot of talk about strategy and the need to be more strategic in your thinking if you want business to succeed but I don’t think there is any agreed definition of strategy.

In fact, looking through various strategy books, many authors have shied away from defining strategy.

Online dictionary definitions of strategy tended to emphasise military strategy and didn’t provide the clarity I was looking for.

The link to the military isn’t surprising as the original Greek word, stratos means army.

The Definition Of Strategy – Strategy Definition From Various Sources

My Strategy Definition

Since this is my blog, I thought I’d start with my definition of strategy which I wrote about in the article What is Strategy:

“Strategy is how you achieve your own objectives by winning the hearts, minds and business of customers by out-thinking and outmanoeuvring competitors.”

Before I delve into other definitions of strategy, I like my version because:

• It is customer focused – the customer is the ultimate judge of whether a strategy is successful based on whether he or she is willing to buy at the price offered. It also recognises that customers must be influenced rationally and emotionally.
• It’s also focused on achieving the objectives of the person or business developing the strategy.
• It emphasises both thought and action
• It brings in competitors who by following their own strategies will be trying to stop you from succeeding.

Let’s see if other definitions of strategy are better or more comprehensive.

Wikipedia Strategy Definition

The first definition of strategy from Wikipedia emphasises strategy’s routes in military campaigns and warfare.

“Strategy, a word of military origin, refers to a plan of action designed to achieve a particular goal. In military usage strategy is distinct from tactics, which are concerned with the conduct of an engagement, while strategy is concerned with how different engagements are linked. How a battle is fought is a matter of tactics: the terms and conditions that it is fought on and whether it should be fought at all is a matter of strategy, which is part of the four levels of warfare: political goals or grand strategy, strategy, operations, and tactics. Building on the work of many thinkers on the subject, one can define strategy as “a comprehensive way to try to pursue political ends, including the threat or actual use of force, in a dialectic of wills – there have to be at least two sides to a conflict.”

To pick up the issue of business strategy I looked at the definition of strategic management in Wikipedia:

“Strategic management is a field that deals with the major intended and emergent initiatives taken by general managers on behalf of owners, involving utilization of resources, to enhance the performance of ?rms in their external environments.[1] It entails specifying the organization’s mission, vision and objectives, developing policies and plans, often in terms of projects and programs, which are designed to achieve these objectives, and then allocating resources to implement the policies and plans, projects and programs.  ”

Johnson and Scholes Definition Of Strategy

In their book, Exploring Corporate Strategy, Johnson and Scholes define strategy

“Strategy is the direction and scope of an organisation over the long-term: which achieves advantage for the organisation through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfil stakeholder expectations”.

Kenneth Andrews Strategy Definition

In his book, The Concept of Corporate Strategy, Kenneth Andrews says

“Corporate strategy is the pattern of decisions in a company that determines and reveals its objectives, purposes, or goals, produces the principal policies and plans for achieving those goals, and defines the range of business the company is to pursue, the kind of economic and human organization it is or intends to be, and the nature of the economic and non-economic contribution it intends to make to its shareholders, employees, customers, and communities.” (pp.18-19)

More Definitions Of Strategy Are Needed

I’ll add to this blog as I find more definitions of strategy but you can help me too by leaving a comment.

How do you define strategy?

Or do you know of a definition of strategy which you find powerful and convincing?

While I believe strategy is important, the more I think about it, the more it seems strange that there aren’t popular definitions for strategy.

I’ve been writing a series of articles about strategy questions so when I learnt that Harvard Business School professor Robert Simons has written a book called Seven Strategy Questions: A Simple Approach for Better Execution, it seems appropriate to include details of the questions.

The Seven Strategy Questions

1. Who Is Your Primary Customer?

2. How Do Your Core Values Prioritize Shareholders, Employees, and Customers?

3. What Critical Performance Variables Are You Tracking?

4. What Strategic Boundaries Have You Set?

5. How Are You Generating Creative Tension?

6. How Committed Are Your Employees to Helping Each Other?

7. What Strategic Uncertainties Keep You Awake at Night?

I haven’t read the book yet but I do think they are an interesting set of strategy questions.

You can learn more at the Harvard Business School blog.

The Five Questions To Build A Strategy

On the Harvard Business Review website, Roger Martin, the Dean of the Rotman School of Management at the University of Toronto in Canada wrote about the five questions to build a strategy.

1. What are our broad aspirations for our organization & the concrete goals against which we can measure our progress

2. Across the potential field available to us, where will we choose to play and not play?

3. In our chosen place to play, how will we choose to win against the competitors there?

4. What capabilities are necessary to build and maintain to win in our chosen manner?

5. What management systems are necessary to operate to build and maintain the key capabilities?

What Do You Think The Important Strategic Questions Are?

Do you have a set of strategy questions you think a business owner or management team should answer to help develop an effective strategy?

If so, please share them in the comment section below.

I want to tell you about an idea I learnt from one of my mentors, Rich Schefren.

It’s called your Core Concept and it has the power to differentiate you in the minds of your potential customers and clients.

The Core Concept is the big idea which is used throughout your marketing and goes deep into your products and services. It’s an idea that gets your prospects excited because you’ve helped them understand their problems in a new way.

Instead of tackling the symptoms and effects of the problem or problems, you’ve helped them to see the cause of their difficulties in a way that makes sense to their minds and emotions.

My Core Concept is about how differentiating your business is the solution to many of the problems which business owners suffer from – low sales and profits, difficulty explaining what you do and a lack of purpose and vision. Quite simply it’s tough running a me-too business but it’s fun owning a business designed to provide great value to  a special group of customers.

I want to talk more about Rich Schefren‘s Core Concept and especially the one that made his name in his first classic report, the Internet Business Manifesto.

The big idea or Core Concept is…

“Opportunity Seekers struggle and fail while Strategic Entrepreneurs succeed massively”

Simple isn’t it?

But it’s also very profound.

There’s a huge problem in Internet marketing where punters buy “magic buttons” for get-rich-quick schemes from greedy gurus.

To be fair, that may not be what they are selling – there are some excellent training programs out there packed with great information if people do the work – but people want the silver bullet.

When they realise that the first opportunity is going to involve that terrible four-letter word… WORK… they decide it’s not for them. By then there’s another magic solution being promoted, and they jump on that.

And keep repeating the cycle because they want big money with little time and effort.

If only life was that simple.

Sure you can learn from the experts but you still have to make stuff happen yourself.

Anyway the Internet Business Manifesto was a big wake-up call to Internet marketers in this opportunity seeking mindset.

It highlights the craziness of what they are up to and it promotes the Business Growth System from Rich Schefren.

Rich Schefren goes into the Core Concept in one of his reports from the Founders Club – “The Single Element Critical To Your Marketing Success: How To Leverage A Core Concept To Go From Mediocrity To Millions.”

In this special report, he goes into detail of how the Core Concept works focusing on the Internet Business Manifesto.

The Core Concept doesn’t just apply to reports.

You can see the same ideas incorporated in the webinar used to promote the Business Growth System. Learning the idea is useful but the big bucks come from taking the idea and applying it in your business.

Do it right and you’ll blaze away from your competitors. No longer are you a provider of general services with many alternatives. Instead, you are positioned as the person who has redefined their issues uniquely and as such, you have the only solution.

I’m still working on my Core Concept and how I can frame it in a way that shows many of the fundamental business issues come back to the issue of business design and creating a unique, differentiated solution.

You can see the tie up and why I am so excited by the Core Concept idea.

If you are going to write an information report and you want it to create demand for your product or service – or if you’re going to create a video presentation – the time you spend understanding the Core Concept and developing your own will make a big difference to your success.

Many people have information reports – but it’s rare that any focus on such strong ideas that they create million-dollar selling products. That’s what Rich Schefren has done time after time.

You don’t have to be an Internet marketer to benefit. It will work just as well for professional services where you still need to demonstrate that you have a unique perspective.

It’s what will differentiate your business and attract clients.

Exit barriers intensify competitive rivalry by stopping businesses that are losing money from leaving the industry when there is little or no hope of future profitability.

The Five Forces model  from Michael Porter is an important way to understand the competitive pressures within an industry and at the centre is competitive rivalry.

What Are The Major Exit Barriers?

I’ve split the discussion of exit barriers into two sections for rational barriers backed up with economic logic and emotional barriers which create commitment beyond the level where it makes sense financially.

Rational Exit Barriers

• Specialised assets – some industries require specialised assets and capabilities which cannot create value in other markets. Assets that can be re-used elsewhere or those that are easily adapted make it easier for a business to move from one market where it is struggling to another where prospects look brighter.
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• Contractual arrangements – the business may have entered into contracts with customers and suppliers where breach of contract creates punitive damages which the business cannot afford. Even if there is nothing in writing, a business may be unwilling to break its commitments because of relationship and reputation damage that could affect other parts of the business or group.
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• Vertical integration with other business units – a group may have a number of subsidiaries connected in the industry value chain. While one may be losing money (although transfer pricing makes it difficult to get a realistic arms-length assessment), damage may be done to the other businesses.

Emotional Exit Barriers

• The business may come under political or social pressure to keep an important factory unit open because it is a key part of the local economy. Sometimes financial help may be available but more often the business fears damage through bad publicity.
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• The owner or senior managers may have an emotional commitment to the business which makes it unwilling to concede defeat even when the economic justification for exit is compelling. Perhaps the business was where it all began and therefore there are heritage reasons to keep the business going which link into the core story. Perhaps there is loyalty to employees or fear for what it means for their own personal positions.

The Impact Of Barriers To Exit

Whatever the cause of the barriers to exit, the end result is that firms stay in the market when it is better for them and their competitors that they leave in an orderly manner.

It therefore makes sense for the market leader or someone determined to win the “last man standing” strategy in a declining market to help struggling firms to leave and take out the excess capacity.

The worst that can happen is for the business to go bankrupt and to be bought for a song by an ambitious management team with an idea to shake-up the industry with a strategic innovation and the financial backing to make it happen.

More often, the existing management and shareholders find the finance to buy the business back in a pre-pack administration deal, free of the high levels of debt and contingent liabilities that stopped an effective turnaround taking place.  It may lead to a viable business or the industry economics may cause future problems.

Many businesses have famous stories of how they began on their way to creating something significant – it’s called an origin story.

Think of one of the hottest brands in the world, Apple and you’ve probably heard a story of how Steve Jobs and Steve Wozniak created the first personal computers in their parent’s garage.

Or what about Fedex?

That started as a school project to create a business plan – and founder Fred Smith reputedly even got a low grade for his efforts. That teacher must feel as foolish as the A&R men who rejected The Beatles.

We like to hear and read stories. It’s why we read novels, watch films and follow the soaps on TV.

And to understand the “now”, we like to know the past and that’s why origin stories are gripping.

The Core Myth

Internet guru Rich Schefren has extended the origin story into a concept he calls “The Core Myth” (not to be confused with the Core Concept for positioning products.)

I call it differentiation by who and why.

Basically your Core Myth is your business story – from the beginning all the way through to the present day. It gives your stakeholders – and especially your customers and employees – a stronger more powerful reason to believe in and commit to your business.

Your Core Myth is inspiring because it covers your big reason for existence – your differentiation by why.

And it’s not just about making you rich.

Neither your customers nor employees care about putting an extra nought or two on your bank balance. Or about you having a fancy car and living in a posh house.

They want to believe that you have a bigger cause which inspires you. Which gives you passion to do what you do.

Your Core Myth goes further than that.

It tells about the struggles you had to achieve what you’ve done.

How you’ve overcome obstacles – sometimes things that would have stopped a lesser man or woman in their tracks.

The Core Myth creates an emotional bond between you and your customers, prospective customers and employees.

It tells the story of who you really are.

It builds understanding and empathy.

And admiration for your achievements.

Most importantly it makes you stand out.

Different from your competitors who either don’t have a Core Myth or haven’t shared it.

It tells of your values.

What’s important to you and what people can rely on from your business.

Learning More About The Core Myth

Rich Schefren goes into great detail on the Core Myth in one of the reports available from the Founders Club. It’s 96 pages long and billed as…

“The Single Story That Sets Your Business Apart: How to leverage a core myth to rally your team, attract and retain more customers, build a powerful brand and grow free”.

It does take some reading because Rich goes into so much detail on how to build your Core Myth and how to tell the story.

My Overall Thoughts On The Core Myth

The Core Myth is a concept I like very much.

Done well, it will differentiate your business along the who and why dimensions.

We may differ on how long it should be.

The impression I get from Rich is that your Core Myth is long and detailed.

That may be where you start but I think you should have different versions of your story.

The same fundamental truths but in different lengths as you vary the level of detail and descriptive passages. I have to admit to being one of those readers who skip over the boring stuff to get to the action when I read novels and even giving up part way through if I don’t get gripped.

I’ve also read enough business books that were 200 plus pages long with a powerful concept that would have made a great 15 page white paper.

People are different and the more you cater for their preferences the better.

The Core Myth is a very interesting way of communicating your business in a way that it’s seen as different – dramatic, exciting and with a compelling purpose.

It builds on the idea that your business can be different and special because you are unique. No one else has the exact same experiences, values and motivations as you do.

My Core Myth goes back to my times as a trainee accountant when I saw nice people with their own businesses earning much less profit than you’d expect. You see much of what you see if is a front – an illusion – created to impress. But doing their accounts meant that the business owners couldn’t hide the reality from me.

I also saw nice people with great little businesses which were making excellent profits.

I became fascinated by what made the difference.

Often it wasn’t down to hard work.

Most small business owners work incredibly long, hard hours that would make unionised employees walk out on strike… and especially when the rate of pay is so low.

My purpose is to make a difference for the nice people who own businesses. Not the ones who are out to scam or con naive customers but those who take pride in what they do and want to do right by their customers.

In his book Competitive Strategy, Michael Porter introduces the idea of generic competitive strategies and says that a business must choose between differentiation and cost leadership or risk being “stuck in the middle”, missing on the high profitability that an effective strategy for one or the other.

Differentiation Or Cost Leadership

Porter argues that businesses face a choice – differentiation or cost leadership over a broad or narrow market – if the firm wants to avoid low profitability that comes from confused customers and employees from a “blurred corporate culture”.

This is because achieving cost leadership normally involves eliminating all those little bits of extra product functionality and customer service that bump up customer value in the eyes of customers looking for a differentiated product because they cost money.

This makes a lot of sense.

Business managers intuitively know that to give the customer more, it’s going to usually cost more.

But then examples started to appear which showed successful businesses which had established a cost leadership position but which were also differentiated.

Quality Is Free

Just as Michael Porter argued that cost leadership and differentiation involved trade-offs that meant you couldn’t do both, it used to be thought that businesses had to choose between low cost and good, consistent quality.

But the total quality movement popularised by Edwards Deming, Philip Crosby and Joseph Juran showed that cost of quality had an inverse relationship. As quality improves, costs didn’t increase as had been expected but reduced.

Differentiation And Cost Leadership

In Michael Porter’s next book, Competitive Advantage, he still warned about the dangers of being stuck in the middle.

“Becoming stuck in the middle is often a manifestation of a firm’s unwillingness to make choices about how to compete. It tries for competitive advantage through every means and achieved none, because achieving different types of competitive advantage usually requires inconsistent actions.” (page 17).

On the next two pages of the book, he softens his stance by admitting that reducing costs does not always mean sacrificing differentiation because using more effective methods and technology may reduce costs and improve differentiation. He goes on to point out that reducing costs from a high position is not the same as achieving a cost leadership position. He looked at this in more detail in What Is Strategy?

Porter identifies three conditions where a business can achieve differentiation and cost leadership:

1. When competitors are stuck in the middle and don’t force the business to the point where differentiation and cost leadership are inconsistent. This may be more often than you would expect in local, fragmented markets where businesses don’t have opportunities for big differentials in input costs for materials and labour.
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   The downside is that weak competitors can make the firm complacent and leave it vulnerable to new market entrants that are better managed.
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2. When cost is strongly determined by market share or interrelationships. Large economies of scale can give the business a big enough cost advantage to allow it to spend some of its cost savings on elements to differentiate the products and still achieve cost leadership. Interrelationships may arise between elements of the industry value chain which one competitor can take advantage of and the others can’t.
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3. The business pioneers a major innovation. Innovative new process technologies may lower production costs that allow the business to invest in differentiation factors or product innovation may deliver both cost leadership and differentiation of customer value attributes. Sustaining this innovation advantage is vital because wants it gets into the general market, the business is forced into the differentiation or cost leadership trade-off. It may even find itself at a disadvantage if rival competitors improve the innovation specifically to lower costs or to create extra differentiation.

The Danger Of The Tempting Lure Of Differentiation And Cost Leadership

A business that achieves differentiation and cost leadership is in a very strong position and should be much the most profitable firm in the industry.

This is precisely why I believe that creating a strategy to achieve both is dangerous.

The lure is strong but so are the traps and being stuck in the middle remains a clear and present danger.

I agree with the conclusion Michael Porter came to in Competitive Advantage.

“A firm should always aggressively pursue all cost reduction opportunities that do not sacrifice differentiation. A firm should also pursue all differentiation opportunities that are not costly. Beyond this point, however, a firm should be prepared to choose what its ultimate competitive advantage will be and resolve the trade-offs accordingly.” (page 20 Competitive Advantage by Michael Porter)

The Value Chain And Competitive Advantage

The value chain was created to help businesses find competitive advantage and while the value chain can be criticised, the technique is very useful to look in detail at your business at the activity level and challenge each activity:

• How does this help differentiate our business from competitors in ways that matter to customers?
• How can we reduce costs in this activity without reducing customer value and service?