Capabilities

Capabilities have three key parts: Priorities, Processes, and Resources (As defined by Harvard Business Professor, Clayton Christensen in several works including the book “How Will You Measure Your Life”).

Priorities — WHY

Determines the allocation of resources and what kinds of processes get created in the first place. Determines why you produce the products and services that you do, make the choices that you do, etc. This is heavily informed by your answers in the Purpose worksheet.

Processes — HOW

Process are how you transform your Resources into a product or service that is more valuable than its raw materials. Your process describe how exactly you go about creating value for your customers. This is covered in the Offering worksheet.

Resources — WHAT

Resources are what you have at your disposal. Includes people, capital, equipment, knowledge, relationships, network, and any other tangible or intangible asset that might enable you to produce a product or service. This is covered in the Offering worksheet.

Problem / Solution Fit

You’ve identified a legitimate problem confirmed via feedback from real, potentially paying customers, and you have an offering that can solve it.

One analogy we use to help make sense of Problem / Solution Fit is the Lock and Key.

Your Customer’s Job is the Lock. It’s a problem to be solved. Inside the lock are certain “pins” that, when pressed in the right combination, cause the lock to open.

Your Offering is the Key. It’s the solution to the problem (your Customer’s Job). The key has certain “teeth” that are designed to connect with certain pins inside the lock. These “teeth” are the Offering’s Features.

Here’s one important difference from a real lock and key, though. Whereas a lock only has two states — locked or unlocked — Customer Jobs can be satisfied to varying degrees.

If a given Offering hits on some of the Customer’s Elements of Value and allows them to get their Job done “well enough”, then they might get used to using that product or service, even though it isn’t really that great.

But if another Offering comes along and hits on more of their Elements, or does so in a way that is more satisfying to the customer, then that customer might switch to the new offering. If you or anyone you know has switched from Email to Slack (software for short, chat-based discussion) for internal communication with coworkers, that’s a great example of this kind of behavior.
Email got the job done “well enough” even though it satisfied very few elements of value for the Customers that used it. The people behind Slack designed a much better Key for the Lock of “communicate with my coworkers”, and people switched from Email to Slack by the tens of millions.

Product / Market Fit

Your business has now validated that the offering you’re providing satisfies a legitimate need from paying customers within a strong market.

This threshold can be evaluated through customer acceptance surveys (would at least 40% of your customers be very disappointed if your offering didn’t exist). Or by tracking and measuring consistent trends amongst your user base (e.g. number of signups in a time frame, repeat use, etc)
It can also be thought of as a threshold to achieve prior to focusing on growth.

Business Model Fit

You’ve optimized the most profitable business model to deliver your proven solution to the paying customer base that’s seeking it.

Evaluating Problem / Solution Fit

Because a given Feature of your Offering will address multiple Elements of Value, we can prioritize which features we want to compete on by looking at the number of Elements each one satisfies, and whether those Elements are areas where we want to strengthen or reduce focus.

For example, a feature that has long been a focus of competition in your industry may only address one or two Elements of Value with little room for competitive opportunity, while another underserved Feature may address several high-priority elements of value and provide strong competitive opportunity. In this case, we would reduce our investment on the first feature, and increase our investment in the second.

Unique Value Proposition

The value proposition is the element of strategy that looks outward at customers, at the demand side of the business. A value proposition reflects choices about the particular kind of value the company will offer, whether those choices have been made consciously or not. A value proposition must answer three fundamental questions:

1. Which customers will we serve? [ Target Customer ]
2. Which customer needs will we meet? [ Important Customer Jobs + Strategic Positioning ]
3. What relative price will provide acceptable value for customers and acceptable profitability for the company? [ Strategic Positioning ]

Activities*

Discrete economic processes, such as operating a sales force, developing products, or physical delivery to the customer. An activity usually involves people, technology, fixed assets, sometimes working capital and various types of information. The activities companies perform are the basic units of competitive advantage because they are the ultimate source of both relative costs and the levels of differentiation a company can offer its customers.

Competitive Advantage*

You have a competitive advantage if your profitability is sustainably higher than that of your rivals. Then you can dig further to understand whether that advantage comes from higher prices, lower costs, or some combination of both. These differences in relative price or relative cost arise because of differences in the activities being performed.

Differentiation*

In marketing, this terms is often used to describe how one offering is positioned in relation to others (i.e. it might offer more quality or features, or it might sell at a lower price). From a business strategy perspective, however this refers to a company’s ability to command a higher relative price than rivals because its offering has increased customer’s willingness to pay.

Value Chain*

The set of all the discrete activities a firm performs in creating, producing, marketing and delivering its good or service. This is the basic tool for understanding competitive advantage, since all costs arise from the value chain’s activities and all differentiation is created by them.

By breaking down your offering into activities you can separate yourself from making broad assumptions about what you think you do well, or where you believe your team is most talented. Instead, you’ll look at the things you actually do to bring your offering to life and grade any advantages you have around them.

When thinking about true competitive advantages, the evaluation needs to be around how an activity impacts your financial performance.

To have a true competitive advantage, an activity either needs to cost less than how a competitor performs it, or allow you to charge more than a competitor — or ideally both.

If neither is true, then you’re competing around that activity on an equal playing field. If you had no competitive advantages in any activities, the only way to differentiate yourself would be to artificially charge less or offer more value without any actual financial gains.

This type of behavior this leads to reduced profits and creates a zero sum game with your competitors — i.e. you’re fighting over the exact same group of customers. You can only win by taking a customer from your competition and every customer you lose means a gain for your competitor.

This “competition to be the best” (in a bad way) can lead to a slow grind of reduced profits and product bloat for everyone, and in the end could put you out of business.

Instead, you want to look for ways to separate yourself from competitors by finding unique ways to execute activities as well as unique combinations of activities that naturally support one another — aka. “fit”.

This allows you to thrive by attracting a specific set of customers that your competition is unable to serve in the same way. You’re no longer competing with them head-to-head but instead creating your own space in the market.
The unique fit of your combination of activities — your business thumbprint — also prevents competitors from easily copying you, which further strengthens the position of your offering.

Competing Feature Set*

Specific features of the offering and how your offering provides value compared to the competition through focus on elevating quality of specific features and divergence of features away from competitors.

Offering and Features

When we say “Offering”, we mean the product or service you are creating for your target customer, taken as a whole. The “Features” are the individual aspects of your Offering that customers interact with or experience. Features should be designed to satisfy your Customer’s Job in ways that prioritize the Elements of Value they care about.

If your Offering is the iPhone, its features include things like the physical case, the screen, storage options, as well as the functions and friendliness of the operating system. Apple customers tend to value aesthetics, premium quality, and convenience, for example, so the iPhone’s features are created to satisfy those Elements of Value.

Operational Effectiveness (OE)*

Commonly called “best practice” or “execution” by managers, OE is an umbrella term for a company’s ability to perform the same or similar activities better than rivals. OE includes a multitude of practices that allow a company to get more out of the resources it uses. Every functional area has its current best practices: the best way to load a factory, the best way to train a sales force, and so on. Differences in OE are pervasive and can explain some differences in relative profitability. OE is about achieving excellence in execution. OE is important to performance, but it is different from strategy.

Relative Buyer Value / Customer* Willingness to Pay

How much the customer is willing to pay for a good or service versus other offerings.

Relative Cost*

Your cost per unit relative to that of your rivals. A relative cost advantage can come from two possible sources: performing the same activities better (competing to be the best, or OE), or choosing to perform different activities (competing to be unique).

Relative Price*

Your price per unit relative to that of your rivals. A relative price advantage comes from differentiation that produces buyer value, or in plainer English, from producing something distinctive for which customers are willing to pay more.

Trade-Offs*

Trade-offs occur when companies have to make choices between strategic positionings that are inconsistent. Those kinds of choices give rise to differences among rivals in cost and value, and thus trade-offs are the economic linchpin of strategy. Trade-offs contribute to the cost and price differences that constitute competitive advantage. Trade-offs also make it difficult for rivals that have made different choices to copy what you do without damaging their own strategies. Thus, trade-offs make competitive advantage sustainable by deterring imitation from existing rivals.

*  Definitions based on or influenced by the book Understanding Michael Porter by Joan Magretta