Michael Porter’s theory of differentiation requires close attention to what he calls the value chain or value activities.
Ultimately, all differences between companies in cost or price derive from the hundreds of activities requires to create, produce, sell, and deliver their products or services, such as calling on customers, assembling final products, and training employees. Cost is generated by performing activities, and cost advantage arises from performing particular activities more efficiently than competitors. Similarly, differentiation arises from both the choice of activities and how they are performed. Activities, then, are the basic units of comparative advantage. Overall advantage or disadvantage results from all a company’s activities, not only few. (Porter Michael, What is Strategy? Harvard Business Review, November-December 1996)
We are what we choose to do.
Reducing cost through increased efficiency is a defensive game. It may be a very effective game in the short-term, but it does not produce a sustainable long-term advantage. Operational efficiency and effectiveness – the foundation of cost competition – is replicable by many competitors. While some competitors will fail to meet industry benchmarks, others will succeed and eliminate your cost advantage.
Operational effectiveness is necessary, but alone it will not create strategic advantage. Porter writes, “Competition based on operational effectiveness alone is mutually destructive, leading to wars of attrition that can be arrested only by limiting competition… Continuous improvement has been etched on managers’ brains. But its tools unwittingly draw companies toward imitation and homogeneity. Gradually, managers have let operational effectiveness supplant strategy. The result is zero-sum competition, static or declining prices, and pressures on costs that compromise companies’ ability to invest in the business for the long term.”
To achieve a sustainable strategic advantage there is a need to decrease cost or increase value delivered in a manner that goes beyond efficiency and clearly differentiates one enterprise from another. Porter makes the point that this kind of strategic differentiation is helpful to customers, helpful to the differentiated enterprise, and can result in a much more stable structure for the entire community of competitors.
But simply being different is not good enough. Eccentricity is not a strategy. To effectively involve others in pursuing goals and engaging troubles – yours or their own – it is necessary to be different in a way that is recognized as valuable.
Porter argues that “strategic positions can be based on customers’ needs, customers’ accessibility, or the variety of a company’s products or services.” In each case, choosing a sustainable strategy requires understanding what the customer values. Not every form of greater access is valued. More and more variety can actually confuse and frustrate. Even authentic responses to real needs can sometimes be discounted.
A high percentage of people with chronic disease fail to observe simple protocols for drug use that will improve their lives and even save their lives. These customers do not value what they need. Most of these people are more likely to consume what they need if the protocols are reinforced by personal communications with health-providers, volunteers, family members or others. Participation in user groups will also encourage most people to engage their troubles more effectively. The social interaction is highly valued, even while the life-saving product is undervalued.
You can discover what others value by observing what they choose to do.
Early in my career a client, specifically a Senior Vice President for Marketing, hired the firm I was with to assess how the enterprise could increase market penetration. The client was closely owned but managed by professionals. The Chairman of the Board was one of the owners and represented the owners’ interests. During the analysis and consultation I met twice with this man. The Chairman’s interaction with me was polite, vague, and rather banal. I wrote him off as a largely uninvolved watchdog who would support any decision that would increase profits.
My final presentation to the executive team was straightforward. Both product studies and market studies pointed to the same set of choices. Greater market penetration was possible, the risks were low, the necessary investments affordable, and the likelihood of sustaining the increased market position was strong. Well before I was two-thirds through the presentation, it was clear the findings were in serious trouble. The Chairman’s questions and comments were skeptical, grumpy, and increasingly angry. He did not value greater market penetration. Rather, he feared it. The fact that our study had found it was possible was a negative.
Shortly after the presentation the Senior Vice President “resigned.” My firm was not retained for further work. The enterprise continued to pursue its traditional market. A quarter century later it continues to be a small player in what appears to be a sustainable market.
I had failed to accurately define my client. I had failed to even ask what my real client valued. I had offered a solution to a problem that the client did not recognize. Precisely because my “answers” were straightforward – even obvious – I should have asked myself why the client had not already embraced at least some of the answers. Why is the client behaving as it is? What should that behavior tell me about what the client values? How can I frame my choices to fit the choices my client is already making?
Today I perceive that the Chairman had a very clear sense of his true self and what he valued in the true self of his enterprise. He was not especially articulate or forthcoming, but neither did I probe very effectively. The assignment I was given could have contributed to the true self that the Chairman had in mind. It did not because I was insensitive to my client’s definition of value.
Moses was a much wiser man. When Moses was given his assignment on Mt. Horeb we certainly would empathize if he had simply said, “yes sir” and scurried away to make sense of the assignment without the intimidating thornbush flaming away. Instead, he anticipated the troubles ahead and pushed God to help him deal with the reality he perceived.
God promises Moses, “I will be with you.” (Exodus 3:12)… “But Moses said to God, ‘If I come to the Israelites and say to them, “The God of your ancestors has sent me to you,” and they ask me “What is his name?” What shall I say to them?” (Exodus 3: 13) Moses is trying to better understand the motivation behind this assignment. What is the identity of – the nature of God – and what does this identity suggest about the origins and intent of the assignment? What does the boss value? God answers. Moses listens and seems ready to accept the intention he perceives. Then Moses shifts his attention to how this assignment may be received by his “clients.” Moses speculates to God, “But suppose they do not believe me or listen to me, but say, “The Lord did not appear to you.” (Exodus 4:1) Moses needs sources of authority and legitimacy. He pushes for it. God gives Moses tools that will help him communicate the credibility and value of what is offered to the Israelites.
Finally Moses turns to his own skills and capacity. He reminds God that he is not an eloquent speaker. At this point God is getting impatient with the push-backs and commands, “Now go, and I will be with your mouth and teach you what you are to speak.” But Moses knows himself too well to accept this brush-off. We read Moses saying, “’O my Lord, please send someone else.’ Then the anger of the Lord was kindled against Moses.” How many of us know ourselves so well that we would argue in this way with our secular boss, not to speak of God? But in the Exodus story God relents and assigns Aaron as spokesperson and deputy to Moses.
Moses gave careful attention to each aspect of the value equation: internal value, external value, and personal value. Unless the value we deliver is responsive to the value that others expect and respect, it is not – in fact – valuable. Unless the value is consistent with our true self, we will be unable to deliver the value.
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