After 5 years for faithful service, our Swiffer wet mop finally gave out the other day and had to be replaced! Shopping for a replacement mop was revealing and served to illustrate how a differentiation advantage can be eroded or modified.
When Swiffer, a Proctor and Gamble brand, introduced their line of cleaning implements, they created a more effective alternative to the traditional dusters and mops. They also locked users in with a switching cost by requiring them to use Swiffer brand cleaning fluids and replacement pads. Backed up by the marketing might of Proctor and Gamble, Swiffer waged an aggressive marketing campaign and gained market share rapidly.
The inevitable happened – Swiffer’s success spawned imitators. The imitators undercut Swiffer in price and managed to erode its share. The main threat to Swiffer came, however, not from imitators, but from new product substitutes which severely undercut Swiffer’s differentiated value proposition and switching costs.
Enter alternatives to the Swiffer wet mop, such as the Vileda, which lowered users costs by allowing them to use cleaning solutions of their own choice and washable pads – thereby removing the switching costs erected by Swiffer. Needless to say, our Swiffer mop has now been replaced by a Vileda on which we can use any cleaning solution and avoid the cost of having to buy replacement pads.
Vileda (and similar offerings) have eroded Swiffer’s position by lowering consumers’ costs. For many consumers, this represents a new and more powerful value proposition than that offered by Swiffer.
The lesson: Swiffer originally created differentiated value but saw that value eroded by an even more powerful expression of value. No differentiated value last forever, especially when success and higher profitability attracts new entrants and imitators. The trick is not just to differentiate, but to keep on differentiating. Happy cleaning!
Competitive advantage – achieving higher rates of profit than the competition – comes from one thing: creating a relative difference in price or cost from rivals.
A relative difference in price means a firm can price higher than the competition by offering unique value that is prized by customers and which commands a price premium. A relative difference in cost means a firm enjoys a cost advantage over rivals and can price lower to gain share, or maintain price parity and enjoy a higher margin.
The key goal of competitive strategy is to enable one of these two relative advantages for a firm. The source of these two advantages is to be found in the firm’s value chain – the extended set of activities or processes it uses to create and deliver value to customers.
Enabling either of these two advantages is neither easy nor quick. Perhaps that is why most firms prefer to resort to tactical approaches to value chain improvement which tend to be focused mainly on reducing costs and preserving margin.
A key question to ask yourself is this: how different is my firm’s value chain from competitors? If it is not different, it is not likely you are creating different value than competitors. “Different” means more than just operating differently. It means choosing different activities which create unique value. This unique value, in turn, commands either a higher price or creates a cost advantage, both of which are resistant to replication by rivals.
Having a cost structure which approximates, or achieves parity, with rivals is not a cost advantage. A firm obtains a cost advantage when its cumulative cost of performing its value activities is lower than that of rivals. Furthermore, the cost advantage obtained must be sustainable. That is, how the firm obtains its cost advantage must be resistant to replication by competitors. A transient cost advantage is no advantage at all.
Firms obtain a cost advantage by either controlling its cost drivers better than rivals, or by reconfiguring its value chain in ways that are fundamentally different from the value chains of competitors.
A cost advantage provider usually emphasizes tight cost control monitoring and control, overhead minimization, the pursuit of economies of scale, and use of the learning curve to lower costs. Firms that are able learn how to execute value chain activities in a way superior to the competition can often obtain unit cost advantages of 20 percent or more in some industries.
Value chain configuration to achieve the lowest total costs always involves differences. Cost advantage providers’ value chains are configured with different activities and processes than those of rivals, involve special supply chain or distributor linkages, and emphasize different amounts of vertical integration. It is the configuration of the value chain that gives rise to the cost advantage, not the firm’s ability to source lower cost inputs or willingness to operate with razor-thin margins by matching competitor’s prices.
Firms often fall into the trap of confusing cost advantage with low manufacturing costs. While this is important, it should be recognized that often a great portion of a firm’s costs reside in activities other than production – for example, in sales and marketing, service, product development, etc. When the focus is on manufacturing costs, these other costs get overlooked and the firm fails to see opportunities for value chain reconfiguration that could reduce these other costs.
Pursuing a cost advantage strategy is not easy. Cost advantage providers need a relenting focus on their value chains and the drivers of costs. And, they must avoid falling into the trap of slashing costs to support margins in favour of price matching with competitors.
How your firm’s value chain is configured is more important than how well you operate it for developing a competitive advantage.
Choosing value chain activities that create either a relative advantage in price or cost from competitors is critical. Too many firms operate legacy value streams that are not well-aligned with either the needs in the marketplace or the firm’s strategy for competing. These firms then tend to fall into the trap of thinking that the route to superior profitability lies in doing better what they already do, rather than creating valuable differences from competitors.
Value chains can be designed to serve target customers by creating relative differences in price or cost. A benefit-driven strategy requires a value chain which creates unique value for customers which commands a higher price. A cost-advantage strategy, in contrast, requires a value chain which operates at the lowest total cost relative to competitors. In either approach, a firm’s value chain activities must be well-selected to ensure they fit with each other and create a cumulative impact on either price or costs which is greater than the individual activities themselves.
Firms should also remember to consider what activities they should not perform. Knowing the target market, its needs, and the value that is required is the starting point for designing and configuring value chains. Activities which are not related to the value required should be designed out of the value chain. Knowing what not to do is as important as knowing what to do.
The real test of the strength of a value chain’s configuration is its sustainability. Firms need to assess how impervious their value chains are to competitive imitation and replication. A value chain configuration which can be easily copied or replicated by competitors will confer no lasting competitive advantage.
Finally, if your firm is considering launching value chain improvement initiatives such as Lean manufacturing or Six Sigma, that is a good time to step back and assess how well your value chain is aligned with the needs of your markets and customers. There is no point is improving value chains that are fundamentally incapable of producing the value customers require, or which fail to create the necessary price or cost differences which lie at the root of superior profitability and competitive advantage.