Price Advantage
in a meaningful and sustainable way
Thoughts from our Faculty
The “Strategy Hexagon”
– How to Build Lasting Strategic Advantage in the Real World
© 2020 Sandy Vaci
If you are like me, you have seen more “strategic road maps” than you care for. I have always had a few problems with them.
- They are needlessly complicated. Cost ‘focus’ vs. cost ‘differentiation’? Hmmm
- They are inward looking. Why cost instead of price, which is what actually matters in the markets?
- They ignore real life. For example, where do you fit in cozying up to the government and getting guaranteed lucrative contracts in return, as a viable strategy?
The best starting point I could find was the seminal work of Treacy and Wiersema – “The Discipline of Market Leaders”. They postulate, based on real life evidence, that to dominate your market you need to excel in one of three areas: Operational Efficiency; Product Excellence; Customer Intimacy.
Taking this further we can say that “Operational Excellence” (which is an inward-looking approach) really drives ongoing “Pricing Advantage” in the market. And their “Customer Intimacy” really, actually, means “Customer Service Excellence”.
So, as a first step, let’s redefine and clarify their three winning strategies (or ‘business models’, if you like) as:
We now have to add “Market Creation”, or “Disruptive Innovation” a’la iPhone, Walkman and Pampers. The smart phone, portable music and disposable diaper markets did not exist before Apple, Sony and P&G created them. Creating a brand-new market where none existed before allows first movers to dominate those markets.
“Market Redefinition” is yet another winning approach. Ryanair did not invent flying. It just redefined what it means – getting from A to B cheaply, competing with buses and trains, not only airlines. Cirque du Soleil did not invent circus productions. But, again, they redefined what it can mean. Coke also redefined their market some time ago as “non alcoholic drinks”, moving away from “sugary carbonated drinks”. They already dominated the latter market, with limited upside. Changing their market definition drove their strategy to move into juices, bottled water and more.
Finally, there is “Mandated Market Dominance”. If you have a patent on a new drug, if you have regulatory protection for what you offer (like financial institutions or professional bodies do) you are probably already using this strategy. Equally, in many parts of the world having good connections with the local government guarantees you will get their building contracts, mineral rights and more. The latter is commonly known as corruption. And just because it is deplorable, it does not mean it is not used successfully by many firms as their strategy.
So we can add the missing three components of our Strategy Hexagon as follows:
While at it, let us also add “more meat” to the first three successful strategies.
Price Advantage has to be meaningful to the target market. It also has to be sustainable. About the only thing that can guarantee sustainability is operational excellence. Outperforming your competition on efficiency. This is how we get back to the original Treacy / Wiersema ‘Operational Efficiency’ point.
Offer Excellence means not only a product, like BMW – “The Ultimate Driving Machine”. It includes everything we offer better than the competition. This can be a service (“your pizza in 30 minutes or it’s free”), convenience (a 7/11 at every corner in Tokyo), consistency (McDonald’s around the world), variety of offers (banks vs. mono-line credit card providers). In other words, all the “Whats” of the offer.
Service Superiority deals with how we deliver all those “Whats” mentioned above. Superior service delivery is driven by customer intimacy, relying on, and using, superior customer understanding. We are talking about the actual engagement and follow up interaction here. How do we deliver what we are providing, in a way that we generate customer delight doing so?
As a summary, let’s take a look at what we have talked about so far:
When you think about it, there is really no more ways of creating an ongoing strategic advantage for your company or unit.
Now, one may say: “But what about a strong brand as your advantage?” I often hear this “brand as an advantage” comment. And I think it is mixing things up. A brand is nothing but a performance promise, linked to something memorable (a name, picture, slogan), delivered. A brand is only an advantage if it is successfully built and supported by one of the above six strategies. A strong brand is a manifestation of your advantage at the end, not your advantage to start with.
On top of it, qualitative and quantitative strength of a brand relies a lot on your marketing savvy. Qualitative strength depends on how well you positioned what you want to say, so that your target segment understands and identifies with it. Quantitative strength is the factual recall of your brand communication. This is driven to a large extent by how well you did your media planning.
Finally, a strategic advantage model must be usable for both external and internal purposes. A “brand based advantage” really only have relevance in the external context. Let me explain.
I often deal with unit leaders within large organizations – functional leaders, department heads, project leaders. One of their key issues is “How can I deliver meaningful value to the organization and how can I make sure it will ensure my area’s survival?” This is a very real concern when outsourcing to specialized service providers is just around the corner for many support functions.
And, in many cases, the potential competition is even more dangerous. It is called “algorithm”. Think of a highly specialized area, such as a Treasury function, managing the company’s funds. How long will it be, before an AI algorithm will be able to do all the market moves / placements / hedging that those highly skilled treasury investment and cash management specialists do today?
Your company’s strong brand will not save you. But we can use the Strategy Hexagon to find the right approach. Market Creation and Market Redefinition are not really options here. Offer Excellence? Forget it. Your AI algorithm will learn faster than any human being. It will calculate market moves much better. It will reinvent itself every second, not every year. Price Advantage? No way. An algorithm takes no salary, needs no office space, has no health insurance costs.
So we are left with Mandated Market Dominance and Service Superiority. This is where we can build successful strategies for that internal unit. For example, if we can lobby the financial regulators not to allow algorithms manage company cash positions we can survive. We could make the point that full algorithmic hedging creates a systemic risk of market melt-down as all algorithms move in the same direction and, for example, dry up market liquidity when it’s needed the most. This is the strategy of “Mandated Market Dominance”.
As an alternative, we can make sure that we dial up the human side of our services to our internal customers. After all, the Board cannot ask an algorithm to attend their meeting, explain why it did what it did and provide a few reassuring words to nervous executives. This is “Service Superiority”.
Next time we will look at how to use the “Hexagon” as an internal evaluation tool of our strategic strengths. We will turn it into a “radar diagram” to look at where we are strong (or weak) and what it means for our future strategy development.
