Playing To Win
Untangling Value Proposition & Competitive Advantage
I was asked a good question last week by a reader (Ben) about value proposition and competitive advantage. Are they the same thing? Or are they different, and if so, how do they relate to one another? It was a question that echoed others that I have received. So, I thought it would be well worthwhile to write my 41st Year II Playing to Win/Practitioner Insights (PTW/PI) piece on Untangling Value Proposition & Competitive Advantage: Important Complements. You can find the previous 93 PTW/PI here.
Framing the Question
The question of value proposition and competitive advantage focuses on the How-to-Win and Must-Have Capabilities boxes in the Strategy Choice Cascade. There are lots of terms tossed around in the context of these boxes — “competitive advantage,” “unique selling propositions,” “competitive edge,” “differentiators,” etc.
I am not terribly picky about the words that are used for strategy. For example, I use the word aspiration in the first box in my Strategy Choice Cascade, but I don’t care if the word is aspiration, vision, mission, purpose, or something else. I care about the underlying strategy concepts. As I have written before in this series, when I talk about Winning Aspiration, I just want an overarching statement of what an organization is in operation to accomplish. I am fine with you calling it whatever you want. However, what I do care about is that your overarching statement is about being the best because anything else is selling your organization short and leaving you vulnerable to a competitor who attempts to be the best — and succeeds.
The rest of the Cascade focuses on the questions that you need to answer to have a chance of delivering on your Winning Aspiration (or whatever you wish to call it). It provides a framework for framing and answering the key questions. If you don’t like my definition of value proposition or competitive advantage, then feel free to use your own. But make sure that your definitions help you to fit together an integrated set of choices that enables you to achieve your aspiration.
My way of thinking about value proposition and competitive advantage is that they aren’t the same, but they are important complements.
My definition of a value proposition is that for a defined set of customers (what I call your Where-to-Play), it is the value to them of your offer (whether product and/or service) versus the costs to you of producing and delivering it to them. The value is measured by the price that the customer is willing to pay for your offer. It doesn’t matter what you think its value is; it matters what the customer thinks. And the value that matters most is the value to the customer to whom you sell your offer. Frito-Lay’s value is defined by what 7-Eleven will pay to put a bag of Doritos on its shelf. That value, of course, is influenced and shaped by what end-customers are willing to pay 7-Eleven to pick that bag of Doritos off its shelf. But end-customers don’t pay Frito-Lay; they pay 7-Eleven. If you aren’t selling directly to end-customers, you have to think about both end-customers and channel in considering and understanding your value proposition.
There are all sorts of value propositions, including many whose costs of fulfilment are as high as or higher than the value to customers. These value propositions don’t last long and cease to be a value proposition that any customer sees! That is why it is always important to consider both value and cost when thinking about value propositions.
The kind of value proposition to aim for, of course, is a winning value proposition, of which there are two forms. In the first, the value of your offer is distinctly greater than that of any competitor, and you can deliver it at proximate cost to competitors. That would be like Four Seasons, Toyota, or Tide. In the other, the value of your offer is proximate to that of competitors, but you can deliver it at a distinctly lower cost, like Vanguard, Mars, or Southwest.
I think of value propositions as effects or outputs. A value proposition is the output that is generated by the set of actions taken by the company in question. It is the output that occurs in the marketplace, influenced by company actions but determined by customer interpretation. It is very important to remember that the company only controls half of that equation. The company fully controls the costs that it incurs. But customers control the other half of the equation — the value that they ascribe to the offer. That is where competitive advantage comes in…
Your competitive advantage is the method by which you will deliver your value proposition in a way that competitors, whether direct, tangential, or potential, either can’t or won’t replicate — and that inability to replicate is what makes the value proposition a winning one. You won’t have a competitive advantage if your value proposition is clever, but when competitors notice its cleverness, they readily replicate it. This is your logic of How-to-Win — how to deliver your winning value proposition in your chosen Where-to-Play. That logic of How-to-Win — or what I think of as theory of competitive advantage — has to be underpinned by a set of Must-Have Capabilities that help you pass the can’t/won’t test. That is, competitors either can’t or won’t replicate your value proposition.
On the can’t front, the competition can’t replicate your value proposition because it doesn’t possess the Must-Have Capabilities that you do. For example, competitors of Westlaw, Thomson Reuters online legal information services business, would like to compete effectively with it and challenge its dominant and very profitable position, but they can’t replicate Westlaw’s key capability — a key-word-driven, searchable database of all the cases that have come out of the US legal system that it has been summarizing and categorizing for over 100 years — while competitors have not. Competitors simply can’t replicate that Must-Have Capability to compete effectively against Westlaw.
On the won’t front, competitors may possess the Must-Have Capabilities, but choose not to employ them to replicate your value proposition. The major automotive OEMs arguably had as strong a set of electric vehicle capabilities as had Tesla at the time Tesla began investing in earnest in the business — arguably the major OEMs had more. But those other OEMs chose not to invest in deploying those capabilities against electric vehicle development because they couldn’t see how to make as high profits in electric vehicles as they did with their internal combustion engine vehicles — if any profits at all. Because of that ‘won’t’ choice, Tesla built its electric vehicle capabilities dramatically while the other OEMs didn’t. And now, Telsa may have an insurmountable lead, a competitive advantage that enables it to operate a winning value proposition.
Putting it Together
Your input is a theory of competitive advantage which specifies the way you will seek to win — your How-to-Win against competition — by building Must-Have Capabilities that competition can’t or won’t replicate. Its output is a value proposition that is either valued more highly while being produced at a similar cost or valued similarly while being produced at a lower cost. That is, theory of competitive advantage is the input, which if done expertly, generates the output of a winning value proposition.
These features need to be consistent with and reinforcing of the other boxes in the Strategy Choice Cascade. For example, Westlaw, Tesla and every company with a winning value proposition has Enabling Management Systems that build, maintain and enhance their Must-Have Capabilities to underpin their How-to-Win. And on average, their value proposition is strengthened by a precise Where-to-Play choice — i.e., customers in the Where-to-Play find the proposition highly valuable as explained in my piece on segmentation earlier in this series. And their four down-the-cascade choices (Enabling Management Systems, Must-Have Capabilities, How-to-Win, and Where-to-Play) together combine to deliver against the Winning Aspiration.
In strategy, words matter, but concepts matter more. ‘Competitive advantage’ and ‘value proposition’ need to have meanings that render them useful in making strategy decisions. To me, best way to think about them is as input and output (or cause and effect if you like that better). The requisite input is a theory of competitive advantage. Sadly, most companies don’t have a theory of advantage at all, as I describe in this viral video. They have a plan. But since they don’t have a theory of competitive advantage as their input, they don’t produce a winning value proposition as their output. The plan will automatically create some form of value proposition — just not a winning one — and almost certainly one that does not pass the can’t/won’t test.
This construct renders value proposition something that you can’t address directly. It is a bit like shareholder value. You may say you want to maximize shareholder value. But that not something that you can make happen by wishing or declaring that it will happen. Shareholder value maximization is an output that is generated by the input of serving your customers brilliantly. You can wish that you have an awesome value proposition. But that will only happen if you come up with a compelling theory of competitive advantage and deploy it. And be ready to tweak it and tweak it if it doesn’t produce the winning value proposition that you hope to see. If the effect isn’t what you are hoping for, go work on the cause rather than bemoaning the effect.