Business Strategy

You will know that you need to have a competitive advantage or competitive edge as the basis for your unique selling proposition.

Are you clear on the dimensions?

For years, I talked about this as the ABCD Rule.

Your Advantage needs to be Better, Cheaper or Different.

Then I came across an article I wrote on the difference between vertical differentiation and horizontal differentiation where I went further.

I said your Advantage needs to be Better, Cheaper, Different, Easier or Faster.

This became the ABCDEF Rule.

This gives you five broad directions to think about when you are considering your customer value strategy and your customer value attribute map (also known as the strategy canvas in Blue Ocean Strategy). These will help you to be clear on which factors are your order winners and which are order qualifiers.

I have a weakness for quotes so I thought I’d start building up a list of my favourite strategy quotes and quotations.

I’ve split these into two categories – those strategy quotes that support strategic planning and those that take more of a negative view about strategy and planning.

Positive Strategy Quotes

I’ve grouped these strategy quotations into different sections, separating those with multiple quotes I like before a general “who said what” category.

Strategy Quotes – Jim Collins

Good is the enemy of great. Jim Collins

The best CEOs in our research display tremendous ambition for their company combined with the stoic will to do whatever it takes, no matter how brutal (within the bounds of the company’s core values), to make the company great. Jim Collins

The kind of commitment I find among the best performers across virtually every field is a single-minded passion for what they do, an unwavering desire for excellence in the way they think and the way they work. Jim Collins

A dream is a feeling that sticks – and propels. Jim Collins

A great company will have many once-in-a-liftetime opportunities. Jim Collins

Those who build great companies understand that the ultimate throttle on growth for any great company is not markets, or technology, or competition, or products. It is one thing above all others: the ability to get and keep enough of the right people. Jim Collins

Focusing solely on what you can potentially do better than any other organizaton is the only path to greatness. Jim Collins

You can’t manufacture passion or “motivate” people to feel passionate. You can only discover what ignites your passion and the passions of those around you. Jim Collins

Greatness is not a function of circumstance. Greatness, it turns out, is largely a matter of conscious choice, and discipline. Jim Collins

Strategy Quotes – Gary Hamel and CK Prahalad (authors of Competing For The Future)

A company surrenders today’s businesses when it gets smaller faster than it gets better. A company surrenders tomorrow’s business when it gets better without getting different.  Gary Hamel and CK Prahalad

Laggards follow the path of greatest familiarity. Challengters on the other hand follow the path of greatest opportunitywhere it leads Gary Hamel and CK Prahalad

An industry full of clones is an opportunity for any company that isn’t locked into the dominant managerial frame Gary Hamel and CK Prahalad

If a top management team cannot clearly articulate the five or six fundamental industry trends that most threaten its firm’s continued success, it is not in control of the firm’s destiny Gary Hamel and CK Prahalad

Strategy Quotes – Michael Porter

Strategy must have continuity. It can’t be constantly reinvented Michael Porter

Strategy is about making choices, trade-offs; it’s about deliberately choosing to be different Michael Porter

The company without a strategy is willing to try anything Michael Porter

The essence of strategy is choosing what not to do Michael Porter

If all you’re trying to do is essentially the same thing as your rivals, then it’s unlikely that you’ll be very successful. Michael Porter

Strategy Quotes – Sun Tzu

If you know the enemy and know yourself, you need not fear the results of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle Sun Tsu

All men can see these tactics whereby I conquer, but what none can see is the strategy out of which victory is evolved Sun Tzu

Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat Sun Tzu

Do not repeat the tactics which have gained you one victory, but let your methods be regulated by the infinite variety of circumstances Sun Tzu

The supreme art of war is to subdue the enemy without fighting. Sun Tzu

Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win Sun Tzu

Ultimate excellence lies not in winning every battle, but in defeating the enemy without ever fighting.  Sun Tzu

If your enemy is secure at all points, be prepared for him. If he is in superior strength, evade him. If your opponent is temperamental, seek to irritate him. Pretend to be weak, that he may grow arrogant. If he is taking his ease, give him no rest. If his forces are united, separate them. If sovereign and subject are in accord, put division between them. Attack him where he is unprepared, appear where you are not expected. Sun Tzu

He will win who knows when to fight and when not to fight Sun Tzu

Invincibility lies in the defence; the possibility of victory in the attack. Sun Tzu

To know your Enemy, you must become your Enemy. Sun Tzu

Strategy Quotes – Other

Vision without action is a dream. Action without vision is simply passing the time. Action with Vision is making a positive difference Joel Barker

If you don’t know where you are going, you are certain to end up somewhere else Yogi Berra

If you can’t describe your strategy in twenty minutes, simply and in plain language, you haven’t got a plan. ‘But,’ people may say, ‘I’ve got a complex strategy. It can’t be reduced to a page.’ That’s nonsense. That’s not a complex strategy. It’s a complex thought about the strategy. Larry Bossidy

However beautiful the strategy, you should occasionally look at the results. Winston Churchill

Let our advance worrying become our advance thinking and planning Winston Churchill

It’s not the situation … It’s your reaction to the situation Robert Conklin

In order to plan your future wisely, it is necessary that you understand and appreciate your past Jo Coudert

Leadership is getting the right people to do the right thing for the right reason in the right way at the right time at the right use of resources Clark Crouch

Strategic Planning is a process by which we can envision the future and develop the necessary procedures and operations to influence and achieve that future Clark Crouch

In the struggle for survival, the fittest win out at the expense of their rivals because they succeed in adapting themselves best to their environment. Charles Darwin

You have to be fast on your feet and adaptive or else a strategy is useless. Charles de Gaulle

In preparing for battle I have always found that plans are useless, but planning is indispensable Dwight D. Eisenhower

Plans are nothing; planning is everything Dwight D. Eisenhower

A goal without a plan is just a wish Larry Elder

Whether you think you can or whether you think you can’t, you’re right! Henry Ford

By failing to prepare, you are preparing to fail Benjamin Franklin

It amazes me that most people spend more time planning next summer’s vacation than they do planning the rest of their lives Patricia Fripp

If you need to take a step back from day-to-day operations and plot out the long-term direction of your user experience strategy, consultants can give you a perspective you can’t get on your own Jesse James Garrett

Man cannot discover new oceans unless he has the courage to lose sight of the shore Andre Gide

Change is not a destination, just as hope is not a strategy Rudy Giuliani

What happens is not as important as how you react to what happens Thaddeus Golas

I always skate to where I think the puck is going to be Wayne Gretsky

Only the paranoid survive Andrew Grove

The essential element of successful strategy is that it derives its success from the differences between competitors with a consequent difference in their behavior Bruce Henderson

Success doesn’t necessarily come from breakthrough innovation but from flawless execution. A great strategy alone won’t win a game or a battle; the win comes from basic blocking and tackling Naveen Jain

High achievement always takes place in the framework of high expectation Jack Kinder

If we do what is necessary, all the odds are in our favor Henry Kissinger

Planning is bringing the future into the present so that you can do something about it now Alan Lakein

A satisfied customer is the best business strategy of all Michael LeBoeuf

If we could first know where we are and whither we are tending, we could better judge what to do and how to do it Abraham Lincoln

If you look at the various strategies available for dealing with a new technology, sticking your head in the sand is not the most plausible strategy Ralph Merkle

Perception is strong and sight weak. In strategy it is important to see distant things as if they were close and to take a distanced view of close things Miyamoto Musashi

Strategic planning is worthless — unless there is first a strategic vision John Naisbitt

There is always a better strategy than the one you have; you just haven’t thought of it yet Sir Brian Pitman

The single biggest problem in business is staying with your previously successful business model… one year too long Lew Platt

Living in the past is a Jethro Tull album, not a smart poker strategy Richard Roeper

In marketing I’ve seen only one strategy that can’t miss – and that is to market to your best customers first, your best prospects second and the rest of the world last John Romero

It takes as much energy to wish as it does to plan Eleanor Roosevelt

What do you want to achieve or avoid? The answers to this question are objectives. How will you go about achieving your desire results? The answer to this you can call strategy. William Rothschild

It’s unwise to pay to much… But it’s worse to pay to little.When you pay to much, you lose a little money… that is all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot…. It can’t be done.If you deal with the lowest bidder, it is well to add something for the risk you run. And if you do that, you will have enough to pay for something better. John Rushkin

You may not be interested in strategy, but strategy is interested in you Leon Trotsky

Innovation is the ability to see change as an opportunity – not a threat. Unknown

The best way to predict the future is to create it Unknown

A good plan today is better than a perfect plan tomorrow Unknown

There will be hunters and hunted, winners and losers. What counts in global competition is the right strategy and success. Heinrich von Pierer

Four steps to achievement: Plan purposefully. Prepare prayerfully. Proceed positively. Pursue persistently William Arthur Ward

In real life, strategy is actually very straightforward. You pick a general direction and implement like hell Jack Welch

The cynic knows the price of everything and the value of nothing Oscar Wilde

You were born to win, but to be a winner, you must plan to win, prepare to win, and expect to win Zig Zigler

Negative Strategy Quotes

The reason that everybody likes planning is that nobody has to do anything Jerry Brown

It is a bad plan that admits of no modification Publilius Syrus

Leadership is a potent combination of strategy and character. But if you must be without one, be without the strategy Norman Schwarzkopf

A good deal of the corporate planning I have observed is like a ritual rain dance; it has no effect on the weather that follows, but those who engage in it think it does. Moreover, it seems to me that much of the advice and instruction related to corporate planning is directed at improving the dancing, not the weather. J. Brian Quinn

Have I Missed Your Favourite Strategy Quote?

If I’ve missed you’re favourite strategy quote, then I’d be delighted if you could add it as a comment.

As I find more that sum up the essence of strategy and strategic planning, I’ll be adding to this list of strategy quotations.

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.

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.
  .
• 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.
  .
• 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.
  .
• 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.

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.
   .
   The downside is that weak competitors can make the firm complacent and leave it vulnerable to new market entrants that are better managed.
   .
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.
   .
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?

I was reading my good friend,  Ian Brodie’s excellent blog, and he introduced me to the term “vertical differentiation” in this article,

Ian helps consultants, coaches and other professionals to get more clients, and he was saying how difficult it is for these people to be unique.

Often these businesses provide similar services to their competitors and have little opportunity to do something new and different – what Ian calls horizontal differentiation.

Vertical Differentiation – Being Better Than Your Competitors

He selects several well known names and argues that what makes them different and successful is not that they do things different, but they do things better.

This is vertical differentiation.

The firms occupy the same horizontal places in the market but clients generally rank them as above competitors.

Vertical Differentiation And The Strategy Canvas

Just to be clear, if you use a visual technique like the strategy canvas (from the Blue Ocean Strategy book) or what I call a customer value attribute map, vertical differentiation is a higher rating on the attributes considered most important to the customer)

Vertical differentiation an interesting idea but I think relying on a strategy of being seen as better is dangerous.

Claiming To Be Better Is Dangerous

First, better is such a nebulous concept and especially for services where so much of what is provided is intangible.

How can a potential client assess whether one lawyer is better than another?

Second, even if they can make an assessment, better like beauty is in the eye of the beholder. It’s difficult to influence since it comes down to personal tastes unless you introduce factors of genuine difference.

Third, if all the professional firms look the same, then different becomes better. Standing out suddenly makes the business look more attractive.

Imagine ten identical beautiful blonde girls in a room – you’d expect each to get an equal amount of attention. Now imagine one went out of the room and came back with her hair dyed brunette.

She stands out and becomes more magnetic. She’s no more beautiful than she was before, but she is different from the others and more memorable because of it.

That little difference can help focus attention and instead of being dazzled by sameness, genuine quality differences might be perceived.

The final big concern about basing a strategy around vertical differentiation and being better is that it increases competitive rivalry. Competition is focused on a few specific attributes. As one rival improves in one dimension of customer value, another is encouraged to take actions to match or improve on that same dimension.

This is likely to create a cycle that increases costs of services but, although the customer value delivered increases, the competitors are unable to capture that value because of competitive pressure on price. Businesses are trying to move away from the customer value line to create advantage rather than along the customer value line to create a different value proposition.

Better Is Worthy But It Can Be A False Perception Of Reality

I believe being better is very worthy (we should all aim to be the best we can be) but it can lead you into a false reality.

We all tend to believe that we are better than we are.

I remember reading some research on professionals who were asked to rank their skills and knowledge compared to their peers. Something like 90% rated their skills as better than average!

How does that work?

It obviously can’t. Average means that 50% are above and 50% are below (strictly speaking that would be the median).

It does point to the problem that people generally think they are better than they are. In marketing this means relying on false hope which isn’t a strategy for success.

Even Clients Will Give You A Biased Answer

I bet you think that you can ask your clients to get an unbiased opinion but the question is rigged.

“Do you think your professional firm is better or worse than average?”

It sounds like a fair question but what’s it really asking?

“Did you make a wise, intelligent decision and use a professional firm that is better than average  or are you an idiot and have you continued to use a professional firm that is below average?”

Yes, you can expect to hear that clients made a wise decision even if they’d never think of making a referral.

If you think you’re better because you’re biased and your clients think you’re better because they are biased too, then vertical differentiation can lead to complacency and you finish up with the stalemate that you see in many professional services.

Differentiating by trying to be better sounds like a cop-out to me unless customers are rigid about their buying criteria and what they expect to experience.

Advantage – ABCDEF

I commented on Ian’s blog with a little acronym I’ve used for years.

ABCD – your Advantage can be Better, Cheaper or Different.

After I’d written it, I thought some more and wish I’d extended it to ABCDEF – your Advantage can be Better, Cheaper, Different, Easier or Faster.

The easier and faster helps to give a couple more dimensions to think about how your business impacts on the customer’s experience. Depending on your definitions, easier and faster could have come out of either the better or different categories.

I’d like to know what you think.

Is there merit in following a vertical differentiation strategy and being better than competitors rather than having horizontal differentiation?

And if it is, how can you communicate that you are better?

Is differentiation and how you will attract and convert customers a vital issue that needs your attention while you are thinking about starting a business or is it something that you can afford to leave until your business is more established?

The Role Of Differentiation In Business Start Up Planning

This is one of those irritating questions where the answer is “it depends”.

Differentiation is about establishing positive reasons for customer preference in the buying decision.

In my article, Will Your New Business Start-Up Succeed? I looked at the three big risks that every business must face and conquer.

Differentiation is a key issue in the second risk – can your business survive the competition?

If You Don’t Have Any Competitors?

If you’re selling into a very clear need or want and you are in the very lucky position that you don’t have any competitive rivalry or threats from close substitutes, then differentiation isn’t a core issue that needs to be tackled in your initial business start-up planning.

You can focus more on the demand risk (and whether there is enough demand for the business to be viable because there might be a good reason why this opportunity has been ignored) and the capability risk.

However, your success might attract competitors and at that stage differentiation and defending your market share become critical issues.

If You Do Have Competitors

If you are competing against competitors then there’s only one occasion when differentiation isn’t a critical issue for your start-up business planning. That’s if demand is much larger than supply and you confidently expect that situation to continue for the foreseeable future.

Few of us are in that situation.

Usually we have spare capacity and so do our competitors. Winning a customer increases our profits and losing an opportunity reduces their profits. If competitive rivalry is intense, then price wars can easily develop unless customers’ bargaining power is reduced by forcing them to make a choice between products and services that aren’t commodities.

If you’ve got competitors, you need to be thinking about target marketing and about what it takes to win business rather than just get in the game.

That means that you’ve got to have a very clear differentiation strategy from the very beginning.

And as you’re clear, you can build it in to everything your business does, inside and outside its boundaries. Your differentiation strategy has a big impact on what you say in your marketing and in how you structure and manage your business.