Value Nucleus

On identifying competitive advantage and why the hardest things to do correctly are the fundamentals

One of the things I’ve found to be surprisingly rare at large companies is a common understanding of what competitive advantage the company truly has. Everyone knows which organizations are the most powerful, what initiatives are en vogue, and which leaders are the ones you really want to work for, but few know what the company is uniquely good at. It’s less trivial than it sounds - large companies inherently contain a great amount of noise bundled with organizational, operational, and strategic complexity alongside cultural history. Understanding this kernel of knowledge is arguably one of the most important things you can do and I’ve seen it make or break leaders. Let’s explore a framework to make it easier to identify — the value nucleus.

Identifying the value nucleus

If you remember back to biology class, a nucleus is a special structure in a cell that regulates the cell’s metabolism and contains its generic code. A company is effectively built on the same thing. A company’s metabolism operates on some core nucleus that drives the overwhelming share of value and its competitive advantage hinges on the some core underlying mechanisms that gave it product-market fit.

So the value nucleus framework is simple: what does a competitor need to do to take away your entire business?

The framing takes away superfluous and peripheral concepts about your business that are generated through the narratives of the organization. You will only focus on the fundamentals when you’re on defense.

Just because something is simple, doesn’t mean it is easy.

One interesting property of the value nucleus framework is that it’s deceivingly simple. Shouldn’t everyone already know the answer to such a question? You’d be surprised. I’d challenge you to answer it for the company you work at and run it past a few colleagues. It’s important to think bigger than just a single feature or a given product (if you’re a multi-product company) and instead think at the level of the company. If you do this challenge, pay attention to: (1) how commonly agreed upon the answer is; and (2) how much investment the identified core areas have.

If the answers are very varied it means your company doesn’t have a good sense of what actually makes it competitive. If you’re a leader, then it becomes paramount to create that clarity and drive it across the organization.

If you have an agreed upon answer, but you see that investment is very low in the areas that would actually drive value there, it means that your company doesn’t actually reward improvements in that area. If you’re a leader, you need to identify what incentives and behaviors resulted in such a state and then modify them.

Evaluating your portfolio

Let’s say now we have identified the value nucleus of the company. How do you assess if your product strategy is really cutting it? Are you really making investments that will really benefit the company? Let's talk about different categorizations of investments.

Extractive Investments

This is probably the most common form of investment. Extractive investments move value from the user to the company. Now, to be clear, you will always need some way to retain a portion of the value for yourself — this is how you make revenue, how you fund future investments, and keep the product running. Therefore, it is essential to have some extractive investments, but there’s a limit. Like any natural resource, you cannot extract more than what you have — and at some point, you need to grow the pie, rather than just eating more and more of it.

Extractive investments look low risk, incremental, and measurable. I’ve seen plenty of leaders just let extractive investments continuously build up either because they expected someone else to do the renewing or because they lacked understanding of the need for a wider view and focused obsessively on moving a one-dimensional metric. That’s how you get to experiences that end up with ads everywhere, paywalls at every turn, and endless popups that keep nudging users to sign up. Overdo the extraction and you start eating away at the nucleus that feeds the entire system. Achieving balance is essential.

Subtractive Investments

As strange as it might sound, it is extremely common to remove things from your own value nucleus. Companies do it all the time — not intentionally, but due to the en vogue narratives of the time, which is an organic thing stewarded by various leaders at various layers across various scopes. This is of course, a very negative thing. History is filled with companies who have diversified themselves to death and we have all used products that have become increasingly complex with features that we felt simply didn’t matter to us. As a leader, it is therefore of paramount importance that you develop the true sense of a value nucleus as soon as possible.

What does a subtractive investment look like in the wild? No one writes a strategy document that describes the initiative as “subtractive”. They look like orthogonal investments that have little to do with the core value proposition of the foundational product. In other words - they tend to look nefariously like expansion plays that can’t answer why the company would be uniquely good at this form of expansion. They are never obviously bad and basically exist in a perpetual state of middling performance. They simply lack feedback loops to the core product, add nothing back to the value nucleus, and tend to have different users. In my own experience, I have found their narratives to look particularly exciting and often influenced by whatever the newest cool thing is.

I have seen plenty of leaders seek to diversify and grow and unfortunately invest in areas that ultimately took away from the core product. There was no connection between the expansion play and the value nucleus that powers the entire company. When you don’t have that connection, you end up desperately trying to feed the expansion play’s growth by siphoning away value from the nucleus, but it doesn’t stick because it isn’t strong enough, and you end up weakening the nucleus for everyone.

Additive Investments

Additive investments enhance and grow the value nucleus. You’ll typically be able to identify these by the fact that they tend to perform surprisingly well — often better than you would have imagined. This surprise factor is important because when you add something to the value nucleus, it tends to intermix with emergent behavior that has an exponential kind of curve. And humans are generally rather unintuitive about exponential behavior. Arguably, the entire point of being a great leader is to be able to create a few of these at any company you’re at.

Additive investments look like expansion plays that answer very well why this company would be uniquely good at that expansion. It has strong feedback loops into the core product, always gives something back to the value nucleus, and it utilizes the same user base (personas or segments may of course vary).

In my own experience, I have generally found additive investments to be somewhat boring looking - a stark contrast to negative investments which tend to be incredibly exciting. This is not a hard and fast rule (besides boring is an expression of taste) — just an observation from personal experience. I have been part of a few additive investments and the hardest challenge I faced in my time incubating and leading them has always been generating enough excitement at the executive level to keep the funding going before we start showing results.

Rebalancing

Categorize each of the investments in your roadmap. Be honest with yourself. Is your portfolio mostly extractive? Do you have anything that could turn out to be an additive investment? Are you actually creating negative investments? Once you’ve done this, try to re-balance your portfolio.

• Make sure there is some allocation for bets that can turn out to be additive

• Draw down your extractive investments if you find that you’re taking more than you’re adding. If you’re not extracting enough, consider reviewing how you capture value and upping your investment.

• Kill negative investments. It’s painful, but you aren’t doing the company, your team, or yourself any favors to keep them going.

Doing this will help you place all your bets along the right baseline and help you better determine how to truly accelerate the trajectory of the areas you lead.