Every business and employee must be able to answer these two questions in a clear, concise and compelling way:
- What do you do?
- What is your Unique Value Proposition?
Unfortunately, there is often a struggle to succinctly describe what the business does as well as confusion surrounding the problems it solves, the target customers it serves best and the benefits / transformation it delivers to them.
Consequently, it is challenging to attract your target customers and communicate why your product / service is superior relative to the competition.
This is a serious problem that results in lower revenues, higher costs and lower business valuation.
It doesn’t have to be that way. By creating IVC’s Strategy Blueprint© (see below), you will nail these two vital questions as you will have defined what your business does, who your target customer is, what problems they have and how your unique value proposition delivers superior value to them relative to the competition.
A winning strategy is not about competing to be the best but instead competing to be unique.
So, how does Southwest Airlines do it?
Southwest is famous for being one of the most profitable companies in the world, even more remarkable as it operates in an industry with one of the lowest returns on capital.
Warren Buffett once jokingly said that “If capitalists had been present at Kitty Hawk when the Wright brothers’ plane first took off, they should have shot it down”!
Southwest’s success stems from its ability to create a unique value proposition and build a capability system designed to deliver it, providing superior value to its target customers relative to the competition.
Critically, Southwest’s winning strategy is hard for competitors to replicate. Each capability within its capability system supports, reinforces and magnifies every other capability; hence to copy it and achieve the same benefits, you must copy the entire system.
How Southwest nails these two questions:
- What do you do? – We “Connect People to what’s important in their lives through friendly, reliable, and low-cost air travel.”
- What is your Unique Value Proposition? – Our Visionis “To be the world’s most loved, most efficient, and most profitable airline.”
Below is a visualisation of Southwest’s Value Proposition versus its competitors (W. Chan Kim and Renée Mauborgne made this visualisation famous in their book Blue Ocean Strategy).
Strategy is about making integrated choices. Southwest has made integrated choices about what it will do, what it will not do and which customers it will serve. It is not trying to be the best airline but to be the best at serving its target customers. A subtle but huge difference as a unique value proposition by definition will require a different standard operating model (capabilities system) to the industry norm.
We have implemented these strategy concepts into our own business model because we firmly believe that it is the way forward, and we can help you to as well.
How Integrated Value Consulting (IVC) answers these two questions:
- What do you do? IVC is a Business Advisory Firm enabling SMEs and investor-backed Startups to Build, Scale and Sell a Valuable Business at a premium
- What is your Unique Value Proposition? We Demystify Strategy & Valuation to Increase Business & Exit Value and Attract & Wow investors for Debt / Equity Raises, Acquisitions & Exits
Below is a visualisation of IVC’s unique value proposition versus the standard consulting model.
Note: IVC has also made integrated choices about what it will do, what it will not do and which customers it will serve. It is not trying to be the best consulting firm but to be the best at serving our target customers with our unique value proposition. To do so, IVC has created a unique capabilities system that differs from the standard consulting capabilities system.
How to Visualise Your Value Proposition Versus the Industry
Creating and visualising your unique value proposition and connecting it to your capabilities system as well as your customers’ problems is a hard mixture of science (logic) and design. However, following the two simple steps below alone will deliver significant value.
Two Steps to Construct and Visualise Your Value Proposition
Step 1 – On the X-Axis:
- First, mark the price and then the factors the industry competes on.
- Add additional new factors, if any, that only you compete on.
Step 2 – On the Y-Axis:
- Mark your price point relative to the industry (High or Low in price terms).
- Plot the level of intensity that you and the industry compete on for the other x-axis factors.
You must satisfy these two critical criteria:
- Your unique value proposition must significantly overlap your customers’ preference profile. By definition, a unique value proposition will serve your target customers very well and your non-customers will be better served by other companies.
- You must be able to connect your core capability system to your unique value proposition and map out your competitive advantage. A failure to do so will result in miss-alignment of the organisation, a loss of distinctiveness and an erosion of your competitive advantage.
Note: be sure to get your customers to verify that your perception of uniqueness matches theirs. It is very common for companies to believe that they are distinctive, but for customers to think they are the same.
A unique proposition and winning strategy can be proven quantitatively. It will show up in your revenues (price + volume), pricing power (ability to pass costs on), market share (consistency or increasing), margins (above industry average), return on capital (higher than the industry average) etc.
Your unique value proposition (this Blog), your target customer (Blog 3 in the Series) and your capabilities system (next Blog) are all interrelated. Unavoidably, you will have to iterate back and forth to find a combination that works for your business and is also aligned with your mission statement (Blog 2 in the series).
Your winning strategy will translate into your competitive advantage and your business valuation – for details see our Blog The “Six Million Dollar Question” for Valuation and Management.
Key Takeaways
1) Business Strategy is not about competing to be the best
A winning business strategy must enable a firm to earn a return on capital that is greater than its cost of capital. This is easier to achieve by competing to be unique, not the best.
Competing to be the best is a tough game to win and invariably ends up with no winners, or one (the lowest cost provider) and low average industry returns on capital.
When competing to be the best it is hard to differentiate yourself in the marketplace. Marketing is, in effect, left with the impossible task of conveying an illusion of uniqueness that naturally nobody can explain crisply, as it is built on smoke and mirrors.
The result is a lack of a competitive advantage, which leads to a return on capital that is equal to or below the expected risk-adjusted cost of capital. The absence of a competitive advantage translates into a business valuation that is around or below the standard industry multiple.
Airlines and the Damage from Sameness
The average airline became obsessed with efficiency (competing to be the best) leading to strategic convergence (sameness) and downward pressure on operating margins.
This move towards sameness cost them dearly as the average airline got hit on all sides: flyers had bargaining power and captured the lower prices (they did not care which airline they flew with); airframers and engine manufacturers had bargaining power and captured a significant portion of industry margins; fuel and wages were commodities. These forces acted as a potent mix that squashed airline profitability.
2) Business Strategy is about competing to be unique
The heart of business strategy is creating a unique positioning that delivers superior value to your target customers. For it to be a winning strategy, your proposition must be created by a capabilities system that is hard for competitors to replicate and deliver the same value.
The capabilities system must be designed so that each capability supports, reinforces and magnifies every other capability. Hence, to replicate it competitors will have to copy the entire capability system (the next Blog in the series will cover this in detail).
To earn excess profits you must create a competitive advantage. This is easier to achieve by competing to be unique, not the best – for details see our blog Competitive advantage needs a winning strategy AND excellent execution
Ferrari and the Boost from Uniqueness
Ferrari has prioritised uniqueness and it is very profitable. Ferrari produces around 10,000 cars per year whereas typical auto companies, e.g. Ford, produce over 5 million. Ferrari is obviously capable of producing a higher volume of cars, but only at the expense of uniqueness, something they have chosen not to sacrifice.
Is that a sensible strategy? For brevity, we will let the stock market be the judge; Ferrari’s stock price is at an all-time high, despite the pandemic, and it has a market capitalisation of c. EUR 35bn – Not bad for producing only 10,000 cars per year!
3) Uniqueness is hard to achieve without a Business Strategy
Creating a unique value proposition requires a unique positioning in the marketplace, which, by definition requires a different standard operating model to the industry norm.
It is hard to achieve and maintain this uniqueness as there are strong forces pushing management towards efficiency, often best achieved by adopting best practices and a standard operating model. However, a company needs to balance the benefits derived from uniqueness with those from efficiency gained from a standard operating model, remembering the cost of sameness.
Being efficient, when everyone else is also efficient, leaves you running very fast on the industry treadmill but going nowhere on a relative basis.
By Hugh Page
MD Integrated Value Consulting (IVC)
- IVC is a Business Advisory Firm enabling SMEs and investor-backed Startups to Build, Scale and Sell a Valuable Business at a premium
- We Demystify Strategy & Valuation to Increase Business & Exit Value and Attract & Wow investors for Debt / Equity Raises, Acquisitions & Exits
Take our Valuable Business Builder© Scorecard: get insights to maximise your business & exit value, for free.
For more details see www.ivconsulting.co.uk
Index of this 6 Part Blog Series
- Blog 1: Overview
- Blog 2: Mission Statement
- Blog 3: Target Customer
- Blog 4: Unique Value Proposition
- Blog 5: Core Capabilities System
- Blog 6: Measurement System
This 6-Part series is designed to add value on its own. To go faster, deeper, overcome inevitable obstacles and take your business to the next level, please schedule a call to see how we can help.
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