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At the Uncertainty Project, we explore models and techniques for managing uncertainty, decision making, and strategy. Every week we package up our learnings and share them with the 2,000+ leaders like you that read this newsletter!

In case you missed it, you can catch up with part 1 and part 2 of this post! This week, part 3 covers ‘Value-Based Strategy’.

Competition and Strategic Decisions - Part 3

Value-Based Strategy

In this three-part series, we have stressed that bringing a competitive lens to your strategy development is crucial, at any altitude in an organization.

While the pursuit of excellence is noble, it’s not enough for a strategic conversation. With limited resources, you can’t pursue excellence in everything. So hard tradeoff decisions are mandatory. What should you prefer in these tradeoffs? Prefer the choices that give you leverage in your competitive environment.

In Part 1, we introduced the idea that all of us, in any work setting, face some kind of competition. It’s a broad spectrum, of course. On one end of the spectrum you see intense, ruthless, business conflict. On the other end of the spectrum, it’s may just be a sense that a changing world will challenge (and compete) with your status quo, whatever that may be.

In Part 2, we talked about how different kinds of “power” creates advantage in competition, and how differentiation is the key to winning. Striving for better is like striving for excellence - it’s noble, but it’s only table stakes. Strategic conversations seek difference and advantage.

Here in Part 3, we will wrap it up with some specific approaches for finding that leverage, in competitive settings. We’ll also highlight how difficult this can be, and reiterate the distinction between leadership and management. Are you a leader, or a manager? Strategists (sitting in higher-altitude positions on the org chart) must be both.

Start with this: Picture yourself at the roulette table. You’ve got a pile of chips in front of you. Do you spread them out across many different numbers, or load up on a big bet on a single number?

When differentiation is the aim, one of these approaches is preferred.

Consider the conventional consensus-driven approach to investment strategy, what is often called “peanut-buttering”. Available funds are spread out thinly across the organization, so all parts are covered.

Do you think this provides better leverage against competitive forces?

In Geoffrey Moore’s mind, the answer is a resounding “no”.

When we study a set of good options, and (in theory) build a strategy by choosing which to do and which not to do, we have an opportunity to make asymmetric bets. An asymmetric bet has the ability to tilt the playing field in our favor, and create competitive advantage.

While this is usually discussed in the context of a business, where the competition is more direct, it could also apply for a department, with multiple teams, seeking to change how they deliver value, with limited resources. Seeking improvement in 20 different places yields middling results compared to a focused effort to improve in one area. 

But this isn’t going to be easy. Geoffrey Moore makes a critically important distinction between leadership and management.

Leaders find a way to make asymmetric bets, but for managers, it’s harder (maybe because it’s not in the job description?). As Moore explains:

“Managers resist asymmetric bets for a host of good reasons:

• They are both inequitable and socially unpopular.

• They are hard for shared services organizations to support.

• They entail taking high-visibility (and potentially career-limiting) risks.

• They run roughshod over personal loyalties.

• They stretch the organization far beyond the limits of its comfort zone.

• They are departures from the norm.”

“Leaders persist in making asymmetric bets, also for a host of good reasons:

• They want the power to win.

• They are more externally than internally focused.

• They want to adapt the company to the market, not the other way around.

• They want to make a difference.

• They want to make sure that sacrifices - which are inevitable in any strategy - are made in a worthwhile cause.”

So, if you are a manager looking to improve your strategic thinking and strategic abilities, the real question is:

Are you prepared to lead?

It demands taking risks, in order to mitigate risks. It requires over-communication, and political savvy. It requires a fresh vision that can become a shared vision, shared even by those who may lose something in the new strategy. It needs good governance, goals, roadmaps, and plans. 

And, you’ll likely need to apply another principle from The Uncertainty Project: Aim for consent not consensus. 

Most of all, you’ll need to bring an unwavering focus on the leverage point at the center of your asymmetric bet. 

But how?

In “Better, Simpler Strategy”, Felix Oberholzer-Gee connects the competitive landscape to value creation activities, with value-based strategy.

He says, “Value-based strategy helps inform your decisions about where to focus and how to deepen your firm's competitive advantage.”

It starts with a shift to an “outside-in” focus, where the competitive landscape is fully visible. Every role in an organization should create and deliver value, right?

Start by thinking about who benefits from the work you do. That’s your “customer”. They want and need the value you create and deliver. You “work for them”. Are they pleased with what you deliver? Why or why not? What do they care about the most?

These things they care about the most are what Oberholzer-Gee calls “value drivers”. They are the attributes of a product or service that form the key criteria for the opinions of your downstream “customer”.

There will be more than one. Find them and stack them up by importance, from the perspective of the “customer” (hint: go talk to them).

You could pursue improvements in any of these value drivers. You could pursue small improvements in each of them, or maybe a big improvement in one of them. The latter would be an example of an asymmetric bet.

Choosing which good ideas you will pursue, and which you will not pursue - relative to the competitive landscape - this is the job of leadership.

A concept called the Value Map can help a leadership team visualize these trade-off decisions.

The value map consists of three parts:

1. A prioritized list of value drivers (prioritized from the perspective of the “customer”)

2. A relative “score” (1-10) of your organization’s ability to deliver on each value driver

3. Similar scoring of your competitor’s ability to deliver on each value driver.

The main idea is that trade-off decisions and asymmetric bets should be made where you lack capability in important areas, and addressing those capabilities can establish differentiation.

In this illustration, we see three value drivers have been identified and ranked. When the leadership team discussed their current ability to deliver on these drivers, they noticed that they felt they were weaker on the one considered most important by downstream “customers”.

When they added the scores for their main competition, they noticed that their biggest advantage was on the lowest ranked driver.

Lastly, as they had a discussion on the best ways to differentiate from the competition, they noticed that a small investment in Value Driver 2 might only pull them “on par” with the competitor, but offer no advantage. Only an asymmetric bet could push them past the competitor on this (most important ) value driver. They also considered shifting some current investment from projects focused on Value Driver 1 to the asymmetric bet needed on Value Driver 2.

There will be uncertainty in the scoring. Drive it via dialog, and make the exercise more qualitative and collaborative than quantitative and analytical.

From this activity, leaders can choose a subset of value drivers to invest in - to establish some strategic intent. Note that this is akin to directing focus to specific problem areas, not picking solutions just yet.

From there, precise ideation activities for value-creation (around the chosen value drivers) can happen. By directing the brainstorming for new projects (or the culling of existing projects), leaders can introduce strategic focus.

What could this brainstorming for value creation opportunities look like?

Since the leaders closest to the front-lines have the best access to information on these opportunities, it is critical that the brainstorming happens at lower altitudes.

In Roger Martin’s words, “This calls for an approach that is less inspired by hierarchy and more by respect for the insights of the people in direct contact with customers, structured and motivated not around optimizing the use of their existing resources and capabilities, but rather around identifying what is needed to deliver value right in front of the customer.” 

And for this, Oberholzer-Gee offers another great visualization, called the Value Stick, which is drawn as a double-ended arrow (against an implied y-axis of $).

The Value Stick is built on two concepts, which together form a working definition of value. But first, we need to get grounded, and product-oriented.

With our outside-in perspective, we can see the work we do as a service (or product) that delivers value to some “customer”. Referencing Jobs-to-be-Done theory, we can say that this “customer” is out there doing a job, and they “hire” our product or service to help them do it more effectively. But, and this is key, they are only willing to engage with this product or service, if it helps them - and if their needs are significant.

We call the magnitude of this need their “willingness to pay”. It’s essentially a “price” at which they are willing to engage. Again, this could be literal (they might actually pay for a service or product) or it could be indirect (they spend their time on the engagement, but not money). When the service or product is awesome, and addresses their needs, the “willingness to pay” increases, the arrow goes up, and the value stick lengthens.

The other end of the value stick is similar and symmetric, but a little more complicated. 

As we create value, and build out our product or service, we form relationships with suppliers and vendors. [Now we are the ones thinking about our “willingness to pay”.] If the supplier is really good, then our willingness might be high. 

But consider another case. In competitive environments, suppliers or vendors might have other motivations to sell to you. It’s a negotiation that resolves into your cost structure for building the product or service. The key idea is that you have some influence on their “willingness to sell” to you. Their “willingness to sell” is essentially the lowest “price” at which the supplier will engage with you. When you actively work to minimize your cost structure for a product or service (by either renegotiating a contract, becoming “easy to do business with, becoming more productive, or forming a special co-development partnership) you are seeking to influence this end of the value stick.

But what if you don’t really have suppliers? What if the main driver of cost is the salaries of the employees creating the value (like for software products)?

Then swap out the “Supplier” on the value stick for “Employee” and swap “Supplier Surplus” for “Employee Satisfaction”. It offers a fresh lens into the value of creating great places to work. An employee’s “willingness to sell” might drop if you offer flexibility on work arrangements. That creates more employee satisfaction, if the compensation is unchanged.

The total value created is visualized as the length of the stick. When you increase the customer segment’s willingness to pay, you are creating more value. When you decrease the supplier pool’s willingness to sell, you are creating more value. This is how we want to build our cases for new opportunities, by talking about how an idea could increase WTP or decrease WTS.

That’s not the whole story of the value stick, however!

In addition to visualizing changes in value created, it can also help visualize changes in value realized by the different stakeholders in this game of value creation.

Think about this: When I make a purchase, and feel like I got a good deal, I experience “customer delight”. The price I ultimately paid felt like it was less than what I was willing to pay. This captures the idea that (for a successful product or service) the WTP is greater than the actual price.

Similarly, if a vendor relationship is critical to our long term mission, then we might accept costs that are higher than the vendor’s point at which they were “willing to sell”. We could have done some hard-nose negotiation to drive the costs down, but we didn’t - we shared some of the created value with the supplier as “supplier surplus”. Tightly integrated value chains do this all the time.

The difference between the “price” and “cost” (for a single unit) is the margin that accrues to us. That’s the amount of the value created we choose to keep for ourselves.

All together, this makes for a powerful, yet simple, way to make the concept of value more tangible in our strategic conversations. It relies on a product-centric and outside-in perspective, but is flexible enough to handle a wide range of competitive situations.

Consider using it as a canvas or template for value-centric ideation, against a specific value driver selected from the value map. Brainstorm new opportunities, and make your case by referencing how it might reshape the value stick.

Oberholzer-Gee explains how this can lead to better, stronger strategies:

“Observing brilliant strategists at work is an incredible experience. I see them making three critical choices.

1. They invest in a small number of value drivers to pull ahead of the competition. Value drivers are the criteria that make up (the overall) WTP and WTS. They are the product and service attributes that are important to your customers.

2. Develop a deep understanding of how the value drivers influence WTP and WTS. 

3. Use smart visuals to cascade their strategy throughout the organization. For example, value maps can connect ideas about value to specific KPIs and projects that increase the performance of the organization.”

Ultimately, this three-part series on competition and strategic decision making has been an argument that competitive factors must find a place in your organization’s decision architectures.

Remember that drafting a decision architecture (one used by leaders at all altitudes) is a great way for senior leadership to improve strategic capability across the organization. By building in an attention to competitive pressures, they can shift the organization’s perspective to more “outside-in” than “inside-out”. 

And since competitive forces can change quickly, this is another source of uncertainty. But we can couple our new attention to the competitive landscape with our new probabilistic thinking and tools for managing uncertainty.

This will require a more structured dialog for strategy development, and strong leadership that values consent over consensus.

But with our beliefs documented, and our tight feedback loops continuously refining our understanding, we can (for the first time) execute adaptive strategies - strategies that can adjust with the flow of the game on the field.