Competitive Strategy

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A group of about 30 carefully selected leaders from across my company spent a week together at the end of September at a retreat. I don’t know how I got included in this group, but I’m grateful. Imposter syndrome was running rampant - none of us felt like we were qualified to be there.

We were treated to an intensive learning experience that focused on a question, What does it mean to have a competitive advantage and how do you gain one? Our instructor was Professor Siggelkow, a vice dean at the Wharton Business School at the University of Pennsylvania - certainly among the smartest people I’ve ever met. Much of the content from the week was based on his book, Connected Strategies which we all got a copy of as pre-reading material. I highly recommend it if you find anything in this post interesting. My goal with this entry is to synthesize the key things I took away from the experience.

What is Competitive Advantage (CA)?

When the difference between Willingness to Pay (WTP) and the cost of your service exceeds that delta for your competition then you have a competitive advantage. As a math formula: \[ CA = (WTP - Cost)_{You} - (WTP - Cost)_{Competition} \]

Put differently, you gain the advantage if you can create more value than your competitors. The trick is figuring out how to do that.

What is Willingness to Pay?

WTP is the highest amount your target customer would willingly pay for your product or service. It is purely based on perceptions and is not the same as the price of your product. Having a price set below a person’s WTP does not guarantee a sale, but it’s a good start. Understanding the drivers of WTP is critical and requires a deep understanding and empathy of your target customer. The more specific the identity of a customer, the easier it is to break down the drivers of WTP into a list. The more diverse your customers, the more likely it is you have multiple segments of customers you are trying to target. The more segments you try to target, the more difficult it becomes to deliver on enough of the WTP drivers to gain an advantage. When your attempt to span too many segments this is called “straddling” and can easily dilute your value.

What is Value?

Value is the perceived gain a customer experiences when they buy your product. It is the difference between WTP and Price: \[ Value = (WTP - Price) \] When someone believes they “got a good deal” on something, their perception of value is high. You need to be able to create that feeling while maintaining a healthy margin between Price and Cost.

What is strategy?

Competitive Strategy is an interconnected series of decisions whose goal is to gain a competitive advantage. This is probably the most profound thing I left the week with. One of those ideas that, in retrospect, is so obvious, but whose application is so profound.

I always thought of things like adding a new product to your portfolio as a complex, but straight forward affair. You identify some gap in your product offering, realize there is a segment you weren’t reaching, and design a new product that should attract them. If the Total Addressable Market (TAM) of that new product is $15mm and your goal is to capture 10% and you can afford to take two years to break even on the investment, spending up to $3mm building the product is pretty obviously a good idea, right? Not necessarily.

What I gained from the week was a way to visualize and quantify the interconnected set of things we, as a company, do and intentionally do not do. Those things are not isolated - one decision or action enables or disables something else. An organization cannot be good at everything, so we must make trade-offs. Often when we try to add a new product into our portfolio we do not appreciate how many things are affected by that action and how it might degrade our ability to be good at something else. If that something else is a core element of what gave us a competitive advantage then that decision could actually cost the company dearly.

Southwest as an example

We spent a lot of time diving in deep on Southwest airlines (and Trader Joes, but I’ll save that for another post). Southwest is a great case study. When pretty much every other airline was losing money and failing, Southwest was thriving. They differentiated in a market that had been very homogenous for a long time. What did they do differently?

And how were they able to accomplish these things?

Recently Southwest announced that they were going to switch to an assigned seat process like other airlines. On the one hand, it makes sense as that is the number one thing people complain about with Southwest. On the other hand, you can see that the decision to board that way is connected to their ability to offer lower prices. By changing to an assigned seat, their boarding time will go up, which will increase the time planes spend on the ground, which decreases their profitability.

If they have to raise prices then the gap between their customers WTP and their cost will decrease because low prices was a driver of WTP, making them less competitive. However, if having an assigned seat raises WTP by an equal or greater amount than low price tickets did, then it actually works out well for them. That is the gamble they are taking with this change. This is a pretty simple illustration, but being able to see the chain of actions and decisions like this was really helpful.

Your strategy is not a trade secret

It was interesting to consider that a company’s competitive strategy is not a secret. Anyone can break down how Southwest or Trader Joes works with just a bit of study and thought. Knowing that Trader Joes has smaller store footprints, more private label products, and less perishable goods does not help Harris Teeter one bit. Everyone knows that stuff. Thinking about strategy as a connected network of decisions and actions helps you realize that it’s virtually impossible to replicate any one component of a competitor. As you pull the thread on how they’re able to do something that gives them an advantage you uncover a whole web of actions, and each layer brings new challenges.

When Southwest started taking market share, many of their competitors launched low cost sub brands to try and compete. All of them failed. That’s because you can’t just change one thing (ticket price) without changing the entire machine and none of those sub brands actually set out to do that.

Quantifying CA

Another key takeaway is that if you cannot quantify your CA, then you don’t have one. We learned how to enumerate drivers of WTP, and evaluate how important each of those things are across customer segments. You can then evaluate your company against your competitors to plot the sentiment of each segment across those drivers. This is where having good market research becomes critical - the more accurate and honest you can plot sentiment the better.

Lastly, you then break down the drivers of cost and what % each driver represents. By understanding how those drivers contribute to cost you can get a feel for where the cost floor is for everyone in the market.

When you put all that analysis together you get a fascinating graph showing you where you lie relative to your competitors in terms of your CA for each segment. You can use that approach to evaluate the impact of the changes you’d need to make in order to go after a new segment or to double down on one.

Another fun side effect of this is that you may be thinking about segments wrong. If you evaluate the WTP drivers across two segments and they end up looking the same then you either got the drivers wrong or those things aren’t actually segments.

Diversity of thought

One other repeated theme for me from the week was how often I was surprised by the way that someone in a working group thought about a challenge differently than I did. Many of us observed that our leaders had done a great job pulling together a very diverse group of people in terms of our lived experiences and ways of thinking. Had our group been more homogenous, we would not have been able to create such well rounded and complete strategic models for many of the challenges we were given during the week.

You simply cannot hope to develop a realistic view of your competitive advantage, or to craft a functional strategy, unless the people involved in that process truly represent the ways your customer segments think and feel. The better they can empathize with your segments the more complete and realistic your drivers of WTP will be, the more accurate you’ll be able to capture and represent perceptions for you and your competition. Unless every decision maker in your target market is an old white guy, hoping a board room full of old white guys can do this well is probably not going to work out over the long term. I already knew this was important, but the week really solidified just how critical diversity (and, therefore, inclusion) is to running a successful company that can compete at scale. This despite DEI not being a specific point of conversation or lecture the entire time.

Summary

There’s no way to break down everything we covered. I can’t recall a time recently when I’ve just sat and thought about one subject in so much depth and for so long. I realized that my mind has gotten tuned to the constant context switching my job requires.

We spent a lot of time talking through the psychology of how you set pricing, impacts of corporate structure, industry dynamics, how technology innovation can impact so much of all this… this list goes on and on. It was a truly amazing experience.

I still think my main takeaway is a much deeper appreciation for how precarious and complex competitive strategy actually is. I’ve been thinking about all the times I worked closely with sales teams and the kinds of feedback I tried to process from them. Lots still to unpack there.

Again, I don’t believe I’ve talked about anything here that Dr. Siggelkow doesn’t cover in his book, so if any of this is interesting to you please go buy a copy of it and spend a good bit of time with it.