The Heart of Strategy

Let’s start with the following multiple-choice question and please select one answer:

Successful business strategy is about:

a. Creating differentiated value

b. Being better than the competition

c. Having the “right people on the bus”

d. Growing the business

Try asking this question at your next internal meeting. If everyone on your team picks just one answer (the correct answer), give yourself a round of applause because I’ve never seen it in the hundreds of strategy workshops I’ve led. And no, there is no “e. All of the above,” because one of the answers is more correct than the others.

Let’s start with “d. Growing the business.” Good guess, but growth without the qualifier of “profitable” can actually be destructive. Starbuck’s CEO Howard Schultz explains, “When you look at growth as a strategy, it becomes somewhat seductive, addictive. But growth should not be–and is not–a strategy…as we return the company to growth, it’ll be disciplined, profitable growth for the right reasons–a different kind of growth.” You can grow your business dramatically–just cut all your prices by 50%. But, save some cash for the chapter 11 bankruptcy filing, because as companies like GM have demonstrated, chasing growth and market share without profits is fools gold.

Next is “c. Having the “right people on the bus.” As most of you know, this maxim comes from Jim Collins, author of books like Built to Last and Good to Great (yes, three-word titles almost guarantee bestseller status). While no one is going to argue that good people aren’t important, they don’t comprise the heart of business strategy. If the “right people on the bus” aren’t capable of thinking strategically and creating plans based on customer insights, then they just might be driving that bus over a cliff.

Moving on to answer “b. Being better than the competition.” Boy, this one feels right. After all, isn’t that why we’re all in business? No, it’s not. There is no such thing as “better.” Better is subjective. Better to you might not mean better to your customer. It depends on their criteria for better. But, different is irrefutable. Harvard Business School professor Michael Porter explains it this way, “There is no best auto company, there is no best car. You’re really competing to be unique…Whole Foods Market is not just trying to be a great food retailer. It’s trying to meet the needs of a certain set of customers.”

Competitive advantage isn’t about beating the crap out of the competition. Competitive advantage is about providing superior value to customers. And that superior value is based on differentiation, which leads us to the correct answer: “a. Creating differentiated value.” Research shows that the primary means to profitably deliver superior value is through differentiation. A study involving 25,000 companies over a 40-year period demonstrated that the firms achieving the highest return on assets  delivered superior value because of their positive differentiation. Another study of 200 companies showed that 93 percent of the top 20 percent of financial performers have a strong form of differentiation in their core, which led to competitive advantage in their market.

Differentiation enables a firm to charge a premium price relative to competitive offerings, operate at a lower cost than competitors or potentially both. As ESPN president John Skipper said, “If you are going to compete, you have to have points of difference. There is no value coming into the market and doing the same thing.”

Creating, developing or discovering real differentiation that fuels the delivery of superior value takes time, thought and the courage to make trade-offs with one’s resources. The intellectually lazy leader’s shortcut of offering similar products or services in the same way as competitors, only trying to do it slightly better, does not constitute differentiation. It’s common to hear these people complain that the products or services their research and development group have come up with don’t offer any differentiation.

Look, if people selling bottled water can find ways to create differentiation, then so can you. One could argue that bottled water is as close to a commodity as you could find. So, following that logic, all bottled water producers should have the same market share, right? Wrong. According to market research firm Information Resources Inc., Nestle Water Pure Life had a 10 percent market share in the still waters category as of May 2012 while Poland Springs was at 6 percent. As former Harvard Business School professor Theodore Levitt wrote, “One thing is certain: there is no such thing as a commodity–or, at least from a competitive point of view, there need not be. Everything is differentiable, and, in fact, usually is differentiated. All goods and services are differentiable.”

A majority of leaders deceive themselves into thinking they’ve cultivated valuable differentiation. A study conducted by Bain & Company surveyed executives and their customers on the level of differentiation they believed the offerings possessed. The researchers concluded, “We found that while 80% of executives felt their offering was highly differentiated, only about 8% of their customers actually agreed with them.”True differentiated value isn’t determined by you. It is determined by your customer, and it shows up in the form of your profits or lack thereof.

Successful business strategy isn’t about better, buses or growth for growth’s sake. It’s about creating differentiated value for your customer.