Harvard Simulation Answers

Any strategy lives or dies on the basis of its customer value proposition. There are many typologies relevant to crafting a value proposition, because there are many ways to win customers.

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But the key issue is always: what is the center-of-gravity in our approach? Do we ultimately compete on the basis of our cost structure (e.g., Ryanair and Wal-Mart) or another basis that increases our target customer’s willingness-to-pay (e.g., Singapore Airlines and Nordstrom)? In other words, will we sell it for more or make it for less — and allocate sales resources accordingly? Nearly all competitive markets confront firms with this choice.

In retailing, there is Wal-Mart, Dollar General, and category killers. But there is also Nordstrom, Louis Vuitton, and many high-end boutiques. In pharmaceuticals, there are blockbuster drugs targeted at mass-markets segments. But there is also Soliris, a drug sold by Alexion to treat certain blood and kidney diseases that afflict relatively few people.

Soliris costs $400,000 per patient annually. But insurers pay this price because Soliris is the only safe and effective treatment for these diseases and that price is less than the total cost of alternative treatments. Alexion has grown from $25 million in sales in 2007 to $1.5 billion in 2014. Sell it for more. Here, your product or service provides better performance on attributes that are important to target customers and for which they are willing to pay a premium.

This approach must continually avoid the following pitfalls: • Meaningless or false differentiation: the points of superiority are unimportant to customers or based on a false presumption of superiority. • Uneconomic or invisible differentiation: customers are unwilling to pay for additional performance or are unaware of the difference. • Unsustainable differentiation: the product or service features are imitated over time. Make it for less. Here, your cost structure allows you to sell and make money at prices that competitors cannot. Realities in many industries typically allow only a few firms to compete successfully in this manner. Once they do, moreover, their scale advantages make it difficult for others to duplicate.

To be a viable value proposition, therefore, this approach must avoid these pitfalls: • Price wars: any cost advantage is lost in price competition and no one extracts value. • Substitutes: you may have a cost advantage over competitors, but not over substitutes that are available to target customers.