For most of the entrepreneurs that we work and speak with, the value proposition is a work-in-progress. There are a lot of reasons for this, not the least of which being that a good business model offers a great deal of value, and that it can be hard to distill that down into a simple statement. One point that can be extremely helpful, though, is to make sure that it is tied back to your competitive advantage.
What does this mean? The term competitive advantage, in of itself, can be just as inexact and all-encompassing as value proposition. Luckily, though, Michael Porter has done the heavy lifting for us. So everyone dust off your copy of Competitive Advantage, because I’m about to give you a quick and cursory review.
A competitive advantage is something that gives you a sustainable edge over the competitors in your industry. It comes in two forms: a cost advantage (you sell the same quality, at superior price) or a differentiation advantage (you sell superior quality, at the same price). In truly exceptional cases, you may see both, but that is truly rare, and doesn’t last. Most good companies choose a competency and build their business models around it.
But even that means very little, in of itself. The real meaning comes when you dig a little further, and say: what makes competitive advantages? According to Porter, they are due to resources and capabilities. Resources are assets: they can be something as tangible as intellectual property, or as intangible as reputation. Established customer bases and industry relationships are further examples of resources, which are divided into three categories: tangible, intangible, and human.
Capabilities, on the other hand, are defined as the ability to effectively utilize resources. They can include research, innovation, financial control, design capability, brand management, commercialization strategy, and much, much more. Functional analysis and value chain analysis can both help you a great deal in determining your most important capabilities.
Once you have determined your competitive advantage, in terms of your resources and capabilities, you will have a sound basis for articulating an extremely well-formed value proposition.
For further information on resources and capabilities, check out the following link:
http://www.blackwellpublishing.com/grant/files/CSAC05.pdf
That’s chapter 5 of Robert M. Grant’s Contemporary Strategy Analysis, titled “Analyzing Resources and Capabilities”. It’s really fascinating stuff, and there’s a lot to be learned from it.
-Myles
