Where does value come from?

Most people have very little idea what makes one business more valuable than another.

This state of affairs tends to persist, because most businesses aren't exactly eager to reveal where their competitive advantages come from either.

My favourite example of this principle is Coca-Cola. In one of the classic bits of corporate mis-direction, Coca-Cola has managed to convince the world that the key to its success is the secret recipe for Coca-Cola, closely guarded by only a few corporate executives. Astonishing numbers of people seem to believe it.

Viewed logically, this is kind of perplexing. Not least, because there's a wikipedia entry for 'Coca-Cola Formula', which lists a number of different purported recipes to try, including one uncovered by Ira Glass on 'This American Life' which claims to be the real deal.

And yet somehow, Coca-Cola doesn't seem to have collapsed since the February 11, 2011 Ira Glass show.

What's truly amazing, though, is that Coca-Cola seems to have managed to convince it's own employees that the value of Coca-Cola is in the recipe. You know this because a number of Coke employees went to Federal prison for trying to sell the Coke secret recipe to Pepsi, back in 2006.

Really?!? In this age of modern chemical analysis? When half the ingredients are listed on the back of the bottle? When the rest could probably be pieced together by a halfway decent organic chemist? That's the thing that's keeping the company afloat?

Of course not. But the myth persists.

The easiest way to see what Coke's real advantage is is to consider the obstacles you'd face if you managed to make a cola that unambiguously tasted better than Coke, to at least 70% of Coke drinkers.

Straight off the bat you've got economies of scale. Coke is enormous and gets enormous discounts. So does Pepsi though, so perhaps we could partner up or at least get financing to grow. But your new drink has to be close to as cheap to produce as Coke in order for you to be competitive.

What else? Well, marketing is the one that probably comes to most people's minds. And truthfully this is a big one. Lots and lots of people around the world know and love Coke. That means that when they go into the supermarket, they already know they'll like it, and so they buy it. Add in fancy marketing terms for affective associations between Coke, good times, and fun parties. Why? Because advertisers have crammed this into their heads over decades.

But perhaps the most neglected is simply logistics. Coke has a crazily effective distribution network. Even if you manage to set up the most-watched viral video that gets everyone fired up about your new cola, you're going to face the problem that it's damn hard for most people to purchase it. Soft drinks tend to be bought with the aim of being consumed then and there. This means that your Amazon strategy of doing internet-only distribution ain't gonna work so flash - people don't plan most of their soft drink purchases weeks in advance. The only way you'll get sales is if you can have your soft drink there at the point that the consumer is thirsty.

And how do you do that? By having your Coke alternative available to buy in every supermarket, every deli, every liquor store, and every hamburger stand. In the whole world. Supplied constantly. So that they never run out.

Think about that. How the hell are you even going to begin doing that?

And that's why you're never going to out-compete Coke.

Setting up an equally good marketing and distribution system isn't impossible, of course. It's just very hard.

It becomes even harder if you're spending all your time trying to work out the magic soft drink formula instead. Coke is happy to let you believe that this is the source of their success, for very good reasons:

In making tactical dispositions,

the highest pitch you can attain is to conceal them;

conceal your dispositions, and you will be safe

from the prying of the subtlest spies,

from the machinations of the wisest brains.