3 Rules for Understanding How Value Leads to Better Performance
The first rule is “Better Before Cheaper”: being price competitive is far from irrelevant but when it comes to position in a market, exceptional performance is caused most often by greater non-price value rather than lower price. There are two dimensions of value along which any company can differentiate itself: price value and non-price value. Research reveals that exceptional companies typically focus on non-price value, even if that means they have to charge higher prices. Price-based competition is a legitimate strategy. Competing with better, rather than cheaper is systematically associated with better long-term performance.
June 6 2013 by Michael E. Raynor and Mumtaz Ahmad
A big part of why we say a non-price position is a material cause of exceptional performance—we found that when exceptional companies abandoned a non-price position, their performance subsequently suffered. For example, in the appliance industry, Maytag delivered a two-decade run of superior profitability that ended in 1986. Its non-price position was defended by a painstakingly constructed combination of product excellence, effective advertising, and high-touch distribution. Its products consistently won superior ratings from Consumer Reports: the Maytag Repairman, who spent his days idled by the legendary quality of Maytag’s clothes washers, became an icon of American advertising; and a distinctive network of more than ten thousand independent retailers proved a highly effective sales channel. In contrast, Whirlpool spent that same twenty-year period manufacturing appliances for Sears, whose Kenmore brand competed with Maytag largely on price.
Thanks to its non-price position, Maytag enjoyed twenty consecutive years of Miracle Worker performance. Then, beginning in the id 1980s, consolidation in the retail channel led to the rise of the so-called big box stores. These retailers tended to carry fewer brands and so preferred those manufacturers with a full range of products, ideally across multiple price points. Maytag had only a relatively a high end line of washers and dryers. Fearful of being dropped by the newly powerful channel, it diversified its product line, largely through acquisitions, such as the 1980 purchase of Magic Chef. The gambit failed, however. The company’s performance declined substantially and steadily, to the point that Maytag was acquired by Whirlpool in 2004.
When Maytag diversified, it took on mid and lower tier brands. This gave the company heft on a distribution landscape that had shifted from a scattered network of independent businesses to a small number of much larger retailers. However, it cost the company something much more valuable: its non-price position relative to Whirlpool and eventually non-U.S. competitors such as LG from Korea and Haier from China.
It turns out that just as there is a pattern for how companies create value (better before cheaper) there is a pattern in how they capture value. A revenue advantage can be driven by higher unit price or higher unit volume, and exceptional companies tend to rely more on price. And so rule number two is Revenue Before Cost.
Revenue before cost (the second of the three rules)—has the merit of providing meaningful guidance because the opposite could have been true: lower cost might systematically have driven superior profitability. Instead, we found that superior profitability is driven by higher revenue, in many cases earned by incurring higher cost. Of the eight exceptional companies with revenue-driven exceptional performance, six relied primarily on higher prices, while two (Merck and Wrigley) relied on volume. Better still, these findings are reflected in our analysis of the full population of exceptional companies.