As many businesses are now implementing a return to active trading, and want to “build back better”, we are continuing to focus on how we can reset our future strategy.
In the most recent of our “Rescue, Recovery, Reinvent” series, article 6, we covered – Competitive Strategy – Why Competing “To Be The Best” is The Worst Strategy Ever.
In this article we looked at how considering the “Generic Strategies” can clarify for us not only, how we compete, but also how this compares with how our rivals chose to compete.
With this high-level view of strategy in front of us, we then consciously choose how we will compete in future. Is our competitive strategy the same as our rivals or is it distinctive? Should we continue as we are? Or are there advantages to a change in strategy? In making this choice we must be conscious that this also determines the level and directness of the competition we will face.
Having made this crucial and defining choice between the two generic strategies – Cost Leadership and Differentiation – we are left with a competitive strategy which is, well “Generic”.
We need to go further. Go deeper into the details and nuances of our particular version of this strategy. There are two parts to developing our competitive strategy from here. (These are shown below.)
Some of the examples in this article are from small businesses that trade in the Leeds area. Not global giants. Just local SME owners who now enjoy running profitable businesses and feel in control. All larger companies use these tools and techniques, we seek to share them with all our clients. They are equally beneficial.
The first part is the Customer Value Proposition which details the customer facing, demand side or external aspects of our strategy. And the second is the “Value Chain”, which details the internal, supply side or operational aspects of our strategy.
The important details which make our strategy individual to us may be in either or both of these elements. However, the generic strategy choice we make strongly influences every detail we add into the Customer Value Proposition and the Value Chain thereafter.
In this article we’ll focus on the Customer Value Proposition or CVP. If you haven’t read the previous articles it might be useful to do so.
Your CVP is the reason why customers choose to do business with you rather than one of your many competitors. It is also the reason they stay. As shown above there are three elements to the CVP. It is important that the relationship between them is robust and makes sense. Your CVP needs to “work” as a whole.
If they don’t, then it’s highly likely that you are straddling two of the generic strategies, always painful. Or even worse that you’re ‘stuck in the middle’ with a strategy that will require huge effort but yield below average profits.
In developing your CVP you might start at any point. There’s no one right way to do this.
If you have selected a “Cost Leadership” generic strategy then it follows that your relative price position will be at the budget end of the scale shown above. It also follows that the value you promise to your customers will start with “Low Prices”. And be followed by one or two aspects which “fit” with the way you intend to deliver low prices without compromising on margin.
For example, ASDA, with its classic “broad, cost leadership” generic strategy promises: “Everyday Low Prices”. To convince customers of this promise they offer a “Price Guarantee”. We will be 10% cheaper or we’ll give you double the difference!
ASDA maintains its margins by leveraging the biggest supply chain in the world as part of the Walmart Group. The goods it sells are purchased in huge volumes allowing them to drive the prices down. For customers this means that they offer a very broad range of products. So, customers can purchase pretty much everything they need for a week or two in one place.
For example, their car parks are usually large and free, and their stores are usually located near main roads so easy to access by car. Its not by accident that these other elements of value promised by ASDA, also help them deliver low prices.
At this point the value promised becomes thinner and more down to individual consumer preferences. The instore bakery, the low-price café, the low-cost school uniforms, the local community programmes etc.
CUSTOMER VALUE PROPOSITION – Cost Leadership
However, it is clear that ASDA does not promise that every one of its hundreds of thousands of products will be the highest possible quality. You can seek out high quality products. But their quality is just OK in the main. Many of their own label products are basic in terms of their ingredients, recipe, variety etc. Their instore service levels are again – OK.
All of which is as it should be with this strategy. It is only possible to deliver high quality and high service levels with low prices by compromising on your returns. This muddled approach to strategy leads to business owners that work incredibly hard for very little profit. If that sounds familiar the issue is in your strategy.
For the “Cost Leadership” generic strategy the value is in the low prices and just enough product or service quality to get by. It’s not that you intend to deliver poor quality or service. It’s about meeting just enough of your customers’ need for quality and service while they enjoy your low prices.
If your generic strategy is “Differentiation” your promise is to create distinctive and desirable products or services for your selected customers. In developing your CVP you must be specific about the customer group you have chosen to serve. This may be ‘broad’ the whole or majority of a market. Or very specific in a smaller group of consumers within the market. For example, selling motor vehicle insurance, broad, compared to selling insurance for motorbike owners who have previously been involved in an accident, narrow or niche.
Once the customer base is set the value you create or the needs you meet flows from your choice of target customer. Meeting their needs is the value you offer.
If following the “Differentiation” competitive strategy you may chose to start with the value you offer, for example, needing more space in your home, you can create a package which meets those needs and has an equal appeal to any consumer who happens to have that need.
Both approaches require some degree of specialisation. And some degree of saying a polite “No!” to different potential customers or potential customers with different needs. An inability to say “No!” is the commonest reason this strategy breaks down. The CVP includes a promise that because we only do this one thing, we are experts and can offer you more value than others that do this and many other things.
Many homeowners need more space but can’t afford or don’t want to move. Possible solutions to this include: extend, dig a basement, build a garden room or convert the attic space.
One builder might promise to build new houses, extend existing ones, dig basements and do loft conversions, all at a low relative price, (A Broad Cost Leadership Strategy).
A builder following a narrow differentiation competitive strategy may promise homeowners in Leeds, because of their specialist knowledge and skills, to build faster, more spacious loft conversions. They may be so confident based on their long experience of doing this, that they offer a guarantee on the price and delivery date they quote.
Do you think the general builder can match this guarantee?
I have highlighted the idea of a guarantee again to make it clear that strategy has to first promise and then deliver some value that your customer desires and can actually experience the difference in practice.
Your CVP has to have substance. If you are offering a specialist sound system based on differentiation in sound quality, every time a prospective customer hears your system they have to say “Wow, that’s amazing!” And so your prospect is prepared to pay the higher relative price that is required to deliver your differentiated value – whether that’s the skilled and experienced joiners required to deliver great loft conversions or the technology to produce amazing sound quality.
Often the greater challenge is not whether customers are prepared to pay a higher price, it’s whether you are prepared to charge them a higher price? To make a differentiation strategy work – you must.
Developing a CVP can sometimes feel like you are going round in circles. That’s normal to start with. This process can make us realise we are not really sure why our customers buy from us. If this is the case for you, go and ask. The responses when we undertake customer research for clients always include surprises. And often include insights which can become a whole new approach to strategy. Or give us the confidence to put our prices up.
The focus so far has been on creating the promise of value to our customers. The next element of competitive strategy, the value chain, focuses on the delivery of this value. Which again must be aligned with our CVP to create a cohesive competitive strategy. More on this in article 8 or our Rescue, Recovery, Reinvent series.
Other Articles in our Rescue, Recovery, Reinvent Series:-
Article 1 – Businesses That Plan Do Better
Article 2 – Business Strategy, Why Bother?
Article 3 – The Importance of Purpose, Vision and Values
Article 4 – How to Predict the Unpredictable
Article 5 – Sh!t Happens