Sunday, October 28, 2007

Strategic Insight in Three Circles

Sometimes the simplest tools are the most elegant and powerful.  In this month’s Harvard Business Review, Joel Urbany and James Davis of Notre Dame’s Mendoza College of Business suggest that critical strategic insights can be gained from populating a template involving just three circles.
Although most executives can recite the truism that a company must build a distinct competitive advantage in order to grow and be profitable over the long term, many have only the fuzziest idea what that really means. . .We often encounter these executives in our consulting work and in our classrooms. We tell them to draw three circles. Those circles, placed in the proper relationship to one another, provide a good visual representation of what strategy—both internal and external—means. 
While Urbany and Davis visualize this as a team exercise, you might try it first by closing your door for an hour, turning off the phone and email, and utilizing the tools of yesteryear: a pencil and a piece of paper.  Here’s how it works.

1. Draw a circle and fill it with the things that customers value and why—that is, Customers’ Needs. Depending on the complexity and breadth of your offering, you may need to focus on a specific customer segment. Note that this exercise, when done in a group, may reveal brand new or emerging opportunities for value creation. Urbany and Davis explain, “The first circle thus represents the consensus view of everything the most important customers or customer segments want or need.”

2. Now draw a second circle. You’ll fill this one with how customers perceive Company Offerings. This one could be especially tricky in a group exercise, because (short of good, hard analysis), there may be plenty of opinions about how customers perceive your product and brand.

3. Now “slide” the two circles together so that your specific set of offerings overlap with customers' needs. Let’s hope that the overlap “feels” good and solid, so that there’s a high comfort level that you are providing some significant benefit or set of benefits that the customer requires. Urbany and Davis tell us, “Even in very mature industries customers don’t articulate all their wants or problems in conversations with companies. ..Customers’ unexpressed problems can often become a source of relationship building and growth opportunity.”

At this point, working on your own, you can probably see a number of areas where further investigation may be required—even though you think about this stuff everyday. And, working as a group, it may be time for a lunch break, as (at least the first time through) there is bound to be a fair amount of debate around both circles, and their overlap.

4. Now it’s time for the last circle, which represents how customers perceive the offerings of your competitors. In a group setting, this may be the circle where there is the least amount of agreement. (Which is why you’re trying this exercise in your office with the door closed, first. Forewarned is forearmed.) This third circle slides up to overlap the first two in a variety of interesting ways, as follows:

Each area within the circles is strategically important, but A, B, and C are critical to building competitive advantage. You should ask questions about each.

For A: How big and sustainable are our advantages? Are they based on distinctive capabilities? (Urbany and Davis note: “But the biggest surprise is often that area A, envisioned as huge by the company, turns out to be minuscule in the eyes of the customer.”)

For B: Are we delivering effectively in the area of parity?

For C: How can we counter our competitors’ advantages?

You first, and later the team, should form hypotheses about the company’s competitive advantages and test them by asking customers. The process can yield surprising insights, such as how much opportunity for growth exists in the white space (E).

Another insight might be what value the company or its competitors create that customers don’t need (D, F, or G). This plays, by the way, to Christensen’s Innovator’s Dilemma: Where have you pushed the technology or offering so far that folks stopped seeing value in it?

Perhaps the greatest insight will be how much opinion and conjecture there are behind your "analysis," instead of data-based knowledge. That alone—knowing what you don’t know—may be one of the most useful outcomes of the exercise.