Posted tagged ‘price competition’

The Five Tests of a Sound Strategy

September 24, 2008

Assuming that we know “what we want to be,” that is, we now have a vision in place, we can begin to immerse ourselves in deciding the best path toward reaching our destination.

Yes, we are finally ready to formalize our business strategy.

Strategy is defined based upon (1) the industry and your position within the industry as well as (2) your position relative to your competitors’ position.

Most people think of strategy as optimizing what they already do and being the best at it, leading them to conclude that there is one, best way to compete. Strategy is really about choosing to differentiate one’s product / services from one’s competitors.

Failing to differentiate one’s products / services from those of one’s competitors – meaning the consumer can’t decide which product is better — creates destructive competition in which the only distinction is price. Price competition is never sustainable and is unwinnable.

Competing effectively means that a company is

  • Exceeding the Industry Average Return
  • Creating a return greater than those of most or all of your competitors

To win, you either have to have a higher price (justified by a differentiation of product / service) or a lower cost (justified by a more efficient value chain). You need to operate from the industry cost vs. your cost and the industry price vs. your price. Regardless, you have to be profitable. After all, you can’t have an army without feeding it…and you can’t have a business without being able to sustain it.

Five Tests of a Sound Strategy

There are five tests of a sound strategy

1.      A unique value proposition compared to competitors

2.      A different, tailored value chain

3.      Clear tradeoffs, and choosing what NOT to do

4.      Activities that fit together and reinforce each other

5.      Strategic continuity (having the strategy permeate throughout the organization)

Defining the Value Proposition

Defining the value proposition means identifying the end users and the channels used to sell to them; understanding the end user’s needs and which products, features, and services will address them; and creating a profitable price at which they will buy. We have already discussed how we can learn more about what our customers are really buying.

According to UCLA Anderson’s School of Management Professor Richard Rummelt, there are two ways to get to a successful value proposition. One, you can invent your way to success. Unfortunately, you can’t count on that. The second path is to exploit some change in your environment – in technology, consumer tastes, laws, resource prices, or competitive behavior – and ride that change with quickness and skill. The key is to take a position while there is uncertainty and ambiguity. Clarity occurs only after a company takes a position. However, by choosing to let another take a position, one loses the opportunity to profit from the knowledge.

The second path is how most successful companies develop their plan. Changes do not come along in nice annual packages, so the need for strategy is episodic, not necessarily annual.

Sustaining Competitive Position – The Role of Tradeoffs

  • Choosing a unique position is necessary but not sufficient to create a sustainable advantage because of the threat of imitation
  • Traditional thinking focuses on competitors’ difficulty or ability to imitate
  • Equally, if not more important, is whether competitors want to imitate
  • Tradeoffs are incompatibilities between strategic positions that create the need for choice
  • Strategic tradeoffs lie at the heart of sustainability
  • An essential part of strategy is choosing what not to do

The takeaway is that as business leaders, we want to encourage choice. In fact, we want to our offering to appeal to our target consumers. We want the service / product to contain exactly what they would like and not have more features than are required, even if they are additional to what the consumer wants. Additional and unnecessary features only drive up our costs and reduce profitability.

In the next post, we’ll talk about companies who employed this approach to great success.


On Choosing Vice Presidential Candidates and Strategic Thinking

August 31, 2008

The recent selection of Delaware Senator Joe Biden to be the Vice Presidential running mate of Democratic Presidential Candidate Barack Obama and the selection of Alaska’s Governor Sarah Palin to serve in a similar capacity by Republican Presidential Candidate John McCain are extremely interesting when perceived through the prism of strategic thought and principles. In fact when viewed in this strategic context, one could easily argue that both presidential candidates made an inappropriate choice in the selection of their running mates.

Senator Obama, a self-proclaimed candidate of change who has also been characterized as lacking experienced chose a Washington insider. Senator Biden, a career politician with 30 years of Washington political experience, was selected to compensate for the perceived weaknesses in Senator Obama’s “resume.” Senator Biden adds foreign policy know-how to another perceived limitation in Senator Obama’s background.

By selecting Governor Palin, Senator McCain, a self-proclaimed candidate of experienced leadership who had also been characterized as someone who would continue the older and more established status quo approach to governing this country, hoped to alter perceived limitations in his background. To counterbalance this perception, he chose Governor Palin, an individual who is younger than Senator Obama, is also a reformer who is not part of the Washington establishment yet is someone who lacks the experience and foreign policy expertise that would make her a clear-cut choice.

In making these choices, the two presidential candidates and their parties have blurred the distinctions between their two messages. The Democratic change agent is in partnership with the insider while the Republican man of experience is in partnership with someone, who like his Democratic rival, is light on accomplishments.

While both presidential candidates have legitimate reasons for selecting their running mates, these reasons fly in the face of more traditional strategic thinking.

Most people think of strategy as optimizing what they already do and being the best at it. This leads them to conclude that there is a singular best way to compete.

However, strategy is really about choosing to differentiate one’s product, service or brand from one’s competition. By doing so, they encourage choice and their appeal to a particualr consumer or constituency.

In the business world, failing to differentiate one’s brands, products or services from one’s competitors creates destructive competition. When there is no perceived differentiation, the only distinction becomes price. Price competition is never sustainable and is typically unwinnable.

Which brings us to why these two leaders might have made their respective choices.

For one possibility, we can turn to a book called “The Discipline of Market Leaders” by MichaelTreacy and Fred Wiersema. These two authors assert that all businesses must at least maintain threshold levels regarding key elements that a customer requires. As an example, if price was above the threshold level of what a consumer might be willing to pay, the other elements of value would not matter in the selection process. The consumer would eliminate the choice simply because it did not meet the threshold level.

It is therefore very possible that Senator Obama felt that his leadership experience was below the threshold level that the electorate might be willing to accept. Senator McCain might have believed that it was critical that he counterbalance his role in Washington with an outsider in order to compete effectively.

Still, it remains to be seen how the electorate will respond to the choices made by the two presidential candidates to blur rather than accentuate their differences.

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