Although most executives can recite the truism that a company must build a distinct competitive advantage in order to grow and be profitable over the long term, many have only the fuzziest idea what that really means. They’re confused by the esoteric language of strategy or they’ve gotten bogged down in the technical details of analytical tools.
We often encounter these executives in our consulting work and in our classrooms. We tell them to draw three circles. Those circles, placed in the proper relationship to one another, provide a good visual representation of what strategy—both internal and external—means. Hundreds of leaders and future leaders have quickly absorbed strategy concepts by using this simple tool and have taken it back to their organizations, where it often becomes part of the decision-making process.
Let’s assume that this exercise is being conducted by an executive team. The team should first think deeply about what customers value and why. For example, they might value speedy service because they want control of their own time or they have other business or family obligations. (Exploring deeper values can open managerial eyes and reveal new opportunities for value creation.) The first circle thus represents the team’s consensus view of everything the most important customers or customer segments want or need. (Other segments can be analyzed later.)
Company’s Offerings, Customers’ Needs
The second circle represents the team’s view of how customers perceive the company’s offerings. The extent to which the two circles overlap indicates how well the company’s offerings are fulfilling customers’ needs. Even in very mature industries customers don’t articulate all their wants or problems in conversations with companies. They weren’t banging on Procter & Gamble’s door demanding invention of the Swiffer, whose category now contributes significantly to the company’s double-digit sales growth in home care products. Rather, the Swiffer emerged from P&G’s careful observation of the challenges of household cleaning. Customers’ unexpressed problems can often become a source of relationship building and growth opportunity.
The third circle represents the team’s view of how customers perceive the offerings of the company’s competitors.
Company’s Offerings, Competitors’ Offerings, Customers’ Needs
Each area within the circles is strategically important, but A, B, and C are critical to building competitive advantage. The team should ask questions about each. For A: How big and sustainable are our advantages? Are they based on distinctive capabilities? For B: Are we delivering effectively in the area of parity? For C: How can we counter our competitors’ advantages?
The team should form hypotheses about the company’s competitive advantages and test them by asking customers. The process can yield surprising insights, such as how much opportunity for growth exists in the white space (E). Another insight might be what value the company or its competitors create that customers don’t need (D, F, or G). Zeneca Ag Products discovered that one of its most important distributors would be willing to do more business with the firm only if Zeneca eliminated the time-consuming promotional programs that its managers thought were an essential part of their value proposition.
But the biggest surprise is often that area A, envisioned as huge by the company, turns out to be minuscule in the eyes of the customer.