First rule of strategy

It actually comes back to what I like to think of as the first rule in strategy. You want to pursue opportunities that are big and that you are uniquely positioned to solve for your customers. This is at the center of every great company. Amazon in e-commerce, Disney in building a meaningful connection with characters that you love. Nike in performance apparel. Each of these companies solves big challenges that no one else can replicate. There aren’t substitutes in the eyes of their customers. And the reason this is so important, the reason that incremental value is the center of great strategy is it’s actually where profits come from.

 I want to draw a quick picture to show you how I think about this. Come on in. So we need to understand the size of our mountain and how we’re going to be able to build profits based on solving these challenges and I like to think about the size of the problem that we’re solving for our customers as the size of a circle that you can draw. 

Let’s say for a second that you solve a challenge for your customer that they would say is worth $100. Now, if you’re the only one that can solve this challenge and you can do it in a unique way, then you’re going to be able to charge a substantial portion of the value that your customer is getting. Maybe you could charge $60 for your product, but on the other hand, if the way that you solve it can be replicated by others where customers think that there are substitutes to solving this problem, then you’re in a commoditization game and you’re not going to be able to charge the same amount, which means your profits will be smaller. And so if you have a unique way to solve this problem, then you’re able to capture a big portion of the circle while creating a ton of value for your customers. But if there are a lot of different organizations that can provide this kind of value, then you’re only going to be able to capture a small amount of the value that you’re creating. 

Now, my guess is you can think of a product in your life whether it be at home or at work where this product is solving a big problem for you and it’s really hard for you to think of another way to solve this problem in the same way where you can’t imagine a substitute helping you solve this challenge. I guarantee you that company has a great business because they are delivering exceptional incremental value to the world.

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