For too many years, complexity and cleverness were used to seemingly create value out of thin air. Risky no-doc, no-money-down loans were sliced and diced, wrapped and repackaged to emerge as safe triple-A investments and enable minimum wage earners to buy half-million-dollar homes. The Detroit 3 auto manufacturers sold the cars that few wanted by giving them away with no interest loans and huge rebates. For anyone who asked for an explanation of his uncannily consistent returns, Bernie Madoff and the feeder funds that resold his product protested that the strategy was too complex to explain. Retailers grew by incessantly adding new locations and tapped into consumers’ bottomless home equity lines, car loans, and new credit cards, with little thought for how or when bills would be paid.
Now that cheap credit has dried up for everyone, complexity and cleverness will no longer carry the day. Businesses can only succeed by returning to fundamentals and delivering real, basic value to customers. Yet, delivering value won’t be enough, with competition more brutal than ever; customers’ budgets have shrunk and every firm is fighting for survival. To do more than scrape by, you have to establish an edge that differentiates you and your offerings from your rivals’. This challenge, never easy in our competitive world, can seem especially overwhelming now when most companies’ budgets have been slashed, and fewer resources are available with which to build your edge.
Fortunately, a “back to basics” approach can simplify the challenge and focus your efforts by adapting the techniques that professional investors (mutual fund managers, institutional shareholder, and equity analysts) have developed over the years when analyzing companies. With portfolios typically holding stakes in one hundred-plus companies, professional investors have had to learn to get at the heart of what drives businesses quickly. With real money at stake, investors also have a lot riding on being right.
Fundamental professional investors decide where to invest money by identifying each business’s “value edge” in three to five bullet points that cover both the value that you create for customers as well as what differentiates your offering from your competitors, and from alternate solutions (including doing nothing). Though boiling your business down to a few points may seem overly simplistic, it is the perfect antidote to the complexity for our credit-crunch hangover. It’s easy and cheap to do—no legions of consultants are required—and it provides an invaluable touchstone for the tough decisions required in our resource-constrained times.
Consider how the management of McDonald’s transformed the company over the last five years, and developed into a business that is thriving even in these challenging times. In 2002, McDonald’s management faced its own crisis as its strategy of growing by adding additional stores no longer worked. Current stores were seeing same-store sales decline as quality fell and customers sought out new dining options. Management responded with a “grand solution” to re-engineer and speed up the ordering process by installing expensive new technology that would separate order-taking from order fulfillment. It didn’t work. In 2003, new management, led by Jim Cantalupo and continued by Jim Skinner, took over, changed course, and refocused on the food: introducing salads, premium coffee, and new breakfast sandwiches. This solution not only worked, it has provided a foundation for McDonald’s to continue to grow.
A look at McDonald’s value edge shows why the complex solution didn’t work and the back-to-basics one did. The three reasons why people eat at McDonald’s and that separate it from other restaurants are: it’s inexpensive, it has tasty food, and comes with a few specialties available only at this restaurant.
Consistency and convenience—you know what you’re going to get anywhere in the world, including quick service and friendly environment and image, particularly for children.
At its most basic, McDonald’s sells food and it has succeeded in many ways because of its distinctive, branded food, e.g., the Big Mac, the Egg McMuffin, Chicken McNuggets. No matter how fast the service, the company is going to fail if customers don’t want its food. Of course, McDonald’s had always maintained test kitchens to come up with new products, including a prior salad attempt, the Salad Shaker. But products like Salad Shakers didn’t work because they were aimed at improving the speed of delivery rather than creating value with the food. When the new leadership came in, they reenergized the salad effort and brought in Newman’s Own salad dressing to distinguish their salads from the competition. Borrowing someone else’s brand and value edge was a quick way to distinguish their effort, and allowed some room to work on building their own products.
The “edge” part of value edge explains why prior management’s focus on speed didn’t work, even though speed of service is an expected part of the value of McDonald’s offering. Improving the speed of food delivery offered no edge. No competitor had meaningfully faster service than McDonald’s and there was no evidence that customers valued faster service. Instead, customers were clamoring for cleaner environments, which the new management addressed by reinvigorating their mystery shopper program and imposing sanctions for those who didn’t meet standards, a decidedly low-tech, basic way to improve the service that customers really valued.
How to Establish Your Value Edge
To establish your value edge and create a touchstone for your decisions on where to focus your resources is inexpensive, but it requires a two-step process. First, write down the three to five elements that your business, department, or unit offers to customers and what distinguishes them from other options. Make the points as simple as possible; full sentences aren’t needed. Keeping it brief is a crucial part of the discipline. One of the perils of operating or managing a business is how easy it is to become mired in the details and the complexity. The goal here is to establish the foundation of your business and what you offer clients; once you have a solid foundation, you can build the details from there.
Second and crucially, you have to test this foundation. You have to obtain feedback to see how solid and differentiated it is. Discuss your bullet points with employees, superiors, trusted customers, and advisors. Solicit feedback on whether they agree with what you’ve identified as your operation’s value and how differentiated it is. An even more rigorous test is to ask a trusted advisor or customer to show the bullet points—without any identification—to knowledgeable third parties to see if they can identify your business from your three points alone. (Another option is to post your three to five points on moneymakersbook.com/valueedge to see if our community can identify your business.) Use this feedback to refine your edge. Revisit and refine your edge periodically. In the meantime, you have a powerful tool to guide your business through tough times.