Creating Competitive Differentiation
Head-to-head competition is rarely advisable. Sooner or later competitive focus moves to price and both parties suffer materially: we should never assume our counterparts will only act rationally and never unthinkingly. Avoiding head-to-head competition relies on management’s ability to create meaningful and valued points of differentiation in the company’s product(s) and customer experience to a specific target audience. Simply put, it’s better, I think, to convince prospects you’re different rather than cheap enough to overcome inertia to change: long-standing relationships and switching-costs, for example. The odds are stacked in the incumbent’s favour.
Defining Competitive Differentiation
Scratching away at all the linguistic garnish about what competitive differentiation and strategy is and isn’t, Business Leaders should focus on four core ways to compete: geography, price, product and customer focus. Differentiation is achieved through the uniqueness of these four factors relative to the competition. There’s also some fundamental rules that can’t be broken in the medium-term, for example: wanting to offer the highest quality solution at the cheapest price. Head to head competition happens when companies compete for the same customers, in the same geography, with similar products at broadly the same price – no differentiation. This encourages prospects to shift their focus to price – a prerequisite condition for market commoditisation.
A Differentiated Position
Achieving a differentiated position is as much about what the Business Leader chooses not to do: products that won’t be offered, customer’s that won’t be served, and so on. When you think about product, think in two ways: the physical product/ service and the intended branded customer experience. By way of example, a similar physical product offer but with dedicated account management, an on-line ordering system and out-of-hours technical support might be ideal to smaller customers with limited internal resource who might pay a premium relative to an alternative supplier who doesn’t offer these benefits. Customer intimacy helps the Business Leader make judgements about what is and isn’t meaningful differentiation.
All Roads Lead to the Customer
Without a customer with a dissatisfaction that’s willing and able to pay for the company’s product/service and convinced the benefit from use is greater than the price, the Business Leader is facing a formidable challenge. I think successful differentiation is therefore always founded on a clear understanding of the customer’s needs.
Moving Beyond Industry Basics
Every industry has minimum standards or attributes for products/services. By this I mean a minimum proposition that’s acceptable to customers. This could be a country office, product performance level, technical support, and so on. The minimum standards or attributes can’t be the company’s differentiators because every company (supplier) must provide these. In effect they help form part of the market entry barriers.
Playing in a Different Way
My sense is that differentiation should always be front-of-mind for Business Leaders. Creating a competitive space the company can win in is about answering four key questions when thinking about the four core ways to compete (above):
- Which parts of the product/service and customer experience should the company REDUCE to the minimum industry standards or even below?
- And which parts should the company STOP providing altogether because they’re no longer wanted by the customer?
- Which parts should the company RAISE above the industry minimum standards because customers want this and the company can also provide these at an acceptable price?
- And which new parts should the company CREATE for the customer that has not been provided before, based on superior insight and understanding of the customer’s operation?