One of the key concepts in successful strategic planning is your organization’s strategic competency.
Simply put, a competency is a set of skills, processes and knowledge which are used to create value for your customers. We often use the term “know-how” to sum this up. Know-how that is strategically useful is rarely something you can buy. Organizational know-how is inevitably created by several people applying their individual know-how in concert.
Simple know-how might enable your organization to provide a service or manufacture a product.
Strategically useful know-how enables you to do this in a way that is valuable to customers. Truly strategic know-how also sets you apart by giving you an ability to do something that is difficult or expensive for your competitors.
It’s almost axiomatic that businesses tend to seek know-how in areas of cost management more than value creation.
In the terms we use in Simplified Strategic Planning, businesses seek commodity know-how rather than specialty know-how. There are three reasons for this. First, cost management know-how can deliver an easily understood advantage regardless of the customer’s perception of the value. Secondly, cost management know-how delivers value regardless of whether the customer is a specialty customer or a commodity customer. Thirdly, most markets have a higher number of commodity customers than specialty customers. This last fact means that the largest company will be the dominant commodity company. This makes the cost management know-how an easily understood way to emulate the largest company.
Cost-management know-how creates value by enabling us to deliver a product or service at a lower cost.
Businesses can use the margin increase that this creates in any number of competitive ways. You can, for example, sell your service for a lower price, then add additional services to the base purchase. Otherwise, make the purchase of your services more convenient by spending the extra margin that lower costs bring you. The easily understood advantage of cost advantages is that cost benefits are inherently numeric and difficult to dispute.
Advantages in value creation are much more difficult.
Not only is value measurement usually subjective, but different values may result in an appeal to different customers. Louis Vuitton’s core handbag product, for example, is extremely high quality and well designed, which may appeal to a more conservative affluent customer. Fendi also makes handbags, but more of the know-how goes into the design than the durability. This may make a Fendi bag more appealing to a more fashion-conscious customer. The very high price points of both brands means our data on this market may come from a very limited group. One could argue the fine points of value in both brands of bag. So why would one invest in this kind of know-how, when it’s so difficult to define and measure?
With handbags, just compare the price points and margins of products with heavy investment in cost management versus value management.
You can buy a similar appearing imitation bag in many discount retail stores for a fraction of the price of the higher end Louis Vuitton and Fendi bags. The materials, design and workmanship show the difference, but the commodity customer is more likely to buy the cheaper bag. All of these factors combine to make the cost of the cheaper bag lower. Even so, the overall margin on the more expensive bag will be higher. This is because some customers will place inordinate value on certain benefits they perceive with the specialty product.
Where is your company’s greatest strategic know-how? Should you be learning more about different kinds of know-how and how they can enhance your profitability? Check out our seminars on Simplified Strategic Planning to learn more about how you can do this.
For great ideas on how to improve the quality of your planning, contact me at firstname.lastname@example.org. Consider holding a one-day workshop on Simplified Strategic Planning.
M. Dana Baldwin is Senior Strategist with Center for Simplified Strategic Planning, Inc. He can be reached by email at: email@example.com