By Timothy Clark *
The entire field of business strategy is about one concept: That concept is an advantage. We call it a competitive advantage. Even though the strategy is massive and can get very complex, you can learn the essence of strategy in 2 minutes. Let’s do it.
There are only two ways to create a competitive advantage: Reduce costs or increase value. These are the two levers that any leader has. Doing strategy is about figuring out the relationship between price and value for any given product or service.
Let me show you the most fundamental diagnostic tool for strategy announcers. It’s called the cost/value matrix. We have value running up and down from low to high and cost running side to side from low to high. This gives us four different combinations:
- We call the upper right quadrant the premium quadrant; it combines high value with high cost. Any high-end product or luxury good is positioned here. For example, I took my wife to a fancy steakhouse the other night; it cost a lot, but the service and quality were exceptional. We paid a lot and got a lot.
- The lower quadrant is called the failed quadrant because it combines low value with high cost. This means paying a lot to get a little. Any product or service that falls into this area will be punished by the marketplace very quickly. No one will buy it. This quadrant is the danger zone, yet products and services naturally drift into this territory if companies don’t continue innovating.
- The lower left quadrant is the commodity quadrant—low cost, low value. You can be successful here, but only if you’re a low-cost producer and have scale. A commodity is an undifferentiated product that competes on price, like a number 2 pencil, a loaf of white bread, or gas for your car.
- Finally, the upper left quadrant is the breakthrough quadrant, a combination of high value and low cost. Usually, more deal costs more, but with advances in technology, we see more breakthrough solutions introduced to the market. Think about Netflix or Spotify, fantastic value at a low cost.
The point of the cost/value matrix is to help you create and sustain a competitive advantage. Now you’re ready to apply the matrix to your own solutions.
* Timothy Clark is the founder and CEO of LeaderFactor. A global authority in senior executive development, strategy acceleration, and organizational change, he’s the author of five books and over 150 articles. He is a highly sought-after advisor, coach, and facilitator to CEOs and senior leadership teams.