Understand 80 vs 8: Do You REALLY have a Competitive Advantage?

McKinsey & Company’s February 2018 magazine included an important article, Strategy to Beat the Odds, with interesting implications.

Most CEOs know the fundamentals of business strategy, including Michael Porter’s “5 Forces” model and the concept of Competitive Advantage which arises from a set of conditions that makes your company superior to rivals and facilitates greater profits.  The article notes a study which found that “80 percent of executives believe their product stands out against the competition – but only 8 percent of customers agree”.

WOW! Peter Drucker said that “the purpose of a business is to create a (profitable) customer”; therefore, it’s their opinion –not that of the executives – that really counts!

Why the discrepancy?  The reason that the article focuses on is what they call “the social side” of strategy. First, when people make decisions, there are inherent biases, such as overconfidence and cognitive biases, (e.g., anchoring, loss aversion, confirmation bias and attribution error), as Daniel Kahneman described in Thinking, Fast and Slow. While they help us filter information in our daily lives, they can distort the outcomes when we make big, consequential decisions infrequently and under high uncertainty – as we do with strategy. Also, affecting the process is the “agency” challenge: presenters who want to get a “yes” to their proposal may exclude contrary information; knowing that proposals are compromised often, executives may overstate requests; and people’s decisions are often influenced by other factors including their own egos and career aspirations.

Another reason stems from Drucker’s perspective: who are your customers? Do you really know who they are and what they want? For instance, what’s really important to potentially-loyal customers who:

  • Use the product infrequently because they are not enamored with it
  • Choose not to use it for reasons the company may not know
  • Never even considered it.

We all know the limits of what rivals can do selling similar customers, similar products for which none have a real Competitive Advantage: (e.g., McDonald’s, Burger King and Wendy’s who fight over “dollar” meals.) Kim and Mauborge propose executives get out of the “bloody” red ocean and service new customers with a “Blue Ocean Strategy” (e.g., Shake Shack). Using value innovation, companies like Cirque do Soleil, NetJets, Curves, Salesforce and Lyft) companies can deliver REAL competitive advantages to targeted new customers.

What does all this mean for you?  Check whether your current customers really perceive your service/product as having a Competitive Advantage. If not can you fix it? If not, does it make sense to:

  • Identify the needs of potentially profitable new customers
  • Build new profitable service/product models that can offer a (sustainable) Competitive Advantage.

 

 

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