Strategizing Offer Power

GUEST POST from Geoffrey A. Moore

Offer power is a function of competitive separation that creates a material difference in customer benefit such that your offer is chosen over its closest alternatives. Separation, in turn, is created by over-committing to a single vector of innovation, taking it to a level that the competition either cannot or will not match. Whatever vector of innovation you choose will define your core, your claim to fame, the capability that sets you apart from the rest. Every other form of innovation will be context, meaning it will still meet market standards but will not differentiate your offering.

With respect to offer power, the most common strategic mistake is to spread the R&D budget across multiple vectors of innovation, making progress on all fronts but never achieving a level of competitive separation that is truly impactful. To offset this tendency, best practice begins with over-committing to a single value discipline, along the lines described by Michael Treacy and Fred Wiersema in The Value Disciplines of Market Leaders. They call out three such disciplines: product leadership, customer intimacy, and operational excellence. Those of us in Silicon Valley might add a fourth, disruptive technology, but the key point is to be asymmetrical in the allocation of resources to take one, and only one of these disciplines, “all the way to bright.”

Value disciplines tend to align with customer sensitivity to price and performance, as illustrated by the diagram below:

Each quadrant in this model prioritizes a different value proposition. For customers who want performance at any cost, disruptive technology is a good bet, albeit coming with risks and issues that other customers would not accept. For enterprise customers, who typically are looking for productivity gains, product leadership fills that bill. For customers who are just looking to check the box with a minimum offer, economy is their watchword, and operational excellence is the main path. And finally, for customers who need the offer but don’t want to be bothered, convenience is the value proposition that resonates most, and customer intimacy is needed to design the experience accordingly.

Whatever offer power strategy you prioritize will act as a filter on your R&D budget allocation to ensure maximum return on innovation. Here is a way to look at the landscape:

There are three ways to get a return on R&D innovation. The first is the one we have been focused on thus far—differentiation that leads to customer preference. But there are two other sources of return, both of which have value in their own right. The first of these is neutralization. This is innovation focused on catching up to some other competitor’s differentiation in order to neutralize their competitive advantage over you. Thus, while Apple is acknowledged as a master of differentiation, Microsoft is a master of neutralization, as once-market-leading and now-defunct enterprises like WordPerfect, Lotus, Ashton-Tate, Novell, and Netscape will all testify. Neutralization allows your customer base to stay current with next-generation product advancements without having to change out vendors. The key point for vendors to keep in mind is that when neutralizing you are trying to catch up, not get ahead, and so the goal is to get to “good enough” as fast as possible and then go no further.

A third type of return on innovation comes from optimization, improving the production and delivery of your current offering without materially changing its features or benefits. This allows you to sustain market positions in mature categories, enabling you to compete on price or capture the savings for other purposes. Because this effort is associated with operational excellence, people often do not recognize it as a form of innovation, but one need only look at what Amazon has done to reengineer the entire retail experience end to end to realize how foolish an idea this is.

One final point: not all innovations create a return. Failed attempts are an inevitable element in any portfolio of innovation attempts, the key being to follow the mantra, win or learn! That said, by far the more common reason that innovation investments fail to create a return is that they fall short of delivering a meaningful impact. This is true of:

• Investments in differentiation that do not go far enough to create meaningful competitive separation. Typically, the team was unwilling to be sufficiently asymmetrical in its resource allocation. As a result, while its products are indeed different, they are not so in a sufficiently compelling way to impact customer preference. This is how Oldsmobile and Mercury lost their franchises in the US auto market.
• Investments in neutralization that do not get to market fast enough to get your offer into the consideration set. Typically, the team making an extra effort to outperform the competitor at their own game, a low-percentage bet at best, but in so doing has left the playing field uncontested in the meantime. By the time you get back in the game, it is too late. This is how Nokia lost its market leadership position in smartphones to Apple.
• Investments in optimization that do not go deep enough to make a material difference. Typically, teams avoid the hard work of process re-engineering and settle for an “across-the-board cut,” which saves money but actually weakens rather than improves performance.

That’s what I think. What do you think?

Image Credit: Unsplash, Geoffrey Moore

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