Differentiation Strategy

It was Tom Peters, the management/leadership guru who co-wrote In Search of Excellence and many other books who came up with the phrase “be distinct… or extinct!”

I really wish I’d thought of it and it conveys the same message as Jack Trout’s Differentiate Or Die.

It puts over the differentiation/branding issue very well although I don’t believe it is black and white.

If you don’t differentiate I don’t think you’ll die or become extinct.

At least not quickly.

It’s more like the death of one thousand cuts.

Your profit will disappear…

… one price cut at a time.

… one lost customer at a time.

… yet another interesting prospective customer you didn’t manage to convert.

Tom Peters was talking about personal branding when he say be distinct or extinct in the book The Brand You.

The same idea applies to businesses.

If you’re not distinct and memorable, you’ll create no impression on your target audience. Your touch points will be forgotten or even ignored.

In the book, Tom Peters gives five ideas to be distinct…

• Ask yourself: What do I want to be known for? What do I want to stand for?

• Perform a Personal Brand Equity Inventory – ask people you know to tell you three or four words or phrases they associate with you. Do you like what they say?

• “Inc.” Yourself – see yourself as an independent contractor who only gets paid for work of value.

• Develop a competence – be excellent at something

• Develop a one-eighth page Yellow Pages advertisement for your personal brand.

Moving those ideas over to your business, you can ignore point 3 since you’re already in the world where you only eat what you kill.

The first two present an interesting comparison. You may never have stopped to think about the words you want others to think about you.

You may be shocked at how different what you want people to think and what they do think. It’s a clear indication of a positioning/branding problem. I was brought up on this when someone I liked said to me “Paul I don’t really know what you do” when I was promoting myself as a generalist business coach.

I’d prefer you to think of capability rather than competence when you think about your business. To me competence sounds such an ordinary word. The idea remains the same, your business needs to be superb at something.

For the second time today, I’m referring to the value disciplines – is your core strength in operational excellence, customer intimacy or product leadership?

Finally, I like the Yellow Pages test. Can you create a short, succinct marketing message which would be up to the job of attracting customers when all your competitors have the same opportunity? This is very much a return to the idea of the Unique Selling Proposition.

Are you ready to be distinct or face the risk of becoming extinct?

You will know that you need to have a competitive advantage or competitive edge as the basis for your unique selling proposition.

Are you clear on the dimensions?

For years, I talked about this as the ABCD Rule.

Your Advantage needs to be Better, Cheaper or Different.

Then I came across an article I wrote on the difference between vertical differentiation and horizontal differentiation where I went further.

I said your Advantage needs to be Better, Cheaper, Different, Easier or Faster.

This became the ABCDEF Rule.

This gives you five broad directions to think about when you are considering your customer value strategy and your customer value attribute map (also known as the strategy canvas in Blue Ocean Strategy). These will help you to be clear on which factors are your order winners and which are order qualifiers.

In his book Competitive Strategy, Michael Porter introduces the idea of generic competitive strategies and says that a business must choose between differentiation and cost leadership or risk being “stuck in the middle”, missing on the high profitability that an effective strategy for one or the other.

Differentiation Or Cost Leadership

Porter argues that businesses face a choice – differentiation or cost leadership over a broad or narrow market – if the firm wants to avoid low profitability that comes from confused customers and employees from a “blurred corporate culture”.

This is because achieving cost leadership normally involves eliminating all those little bits of extra product functionality and customer service that bump up customer value in the eyes of customers looking for a differentiated product because they cost money.

This makes a lot of sense.

Business managers intuitively know that to give the customer more, it’s going to usually cost more.

But then examples started to appear which showed successful businesses which had established a cost leadership position but which were also differentiated.

Quality Is Free

Just as Michael Porter argued that cost leadership and differentiation involved trade-offs that meant you couldn’t do both, it used to be thought that businesses had to choose between low cost and good, consistent quality.

But the total quality movement popularised by Edwards Deming, Philip Crosby and Joseph Juran showed that cost of quality had an inverse relationship. As quality improves, costs didn’t increase as had been expected but reduced.

Differentiation And Cost Leadership

In Michael Porter’s next book, Competitive Advantage, he still warned about the dangers of being stuck in the middle.

“Becoming stuck in the middle is often a manifestation of a firm’s unwillingness to make choices about how to compete. It tries for competitive advantage through every means and achieved none, because achieving different types of competitive advantage usually requires inconsistent actions.” (page 17).

On the next two pages of the book, he softens his stance by admitting that reducing costs does not always mean sacrificing differentiation because using more effective methods and technology may reduce costs and improve differentiation. He goes on to point out that reducing costs from a high position is not the same as achieving a cost leadership position. He looked at this in more detail in What Is Strategy?

Porter identifies three conditions where a business can achieve differentiation and cost leadership:

1. When competitors are stuck in the middle and don’t force the business to the point where differentiation and cost leadership are inconsistent. This may be more often than you would expect in local, fragmented markets where businesses don’t have opportunities for big differentials in input costs for materials and labour.
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   The downside is that weak competitors can make the firm complacent and leave it vulnerable to new market entrants that are better managed.
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2. When cost is strongly determined by market share or interrelationships. Large economies of scale can give the business a big enough cost advantage to allow it to spend some of its cost savings on elements to differentiate the products and still achieve cost leadership. Interrelationships may arise between elements of the industry value chain which one competitor can take advantage of and the others can’t.
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3. The business pioneers a major innovation. Innovative new process technologies may lower production costs that allow the business to invest in differentiation factors or product innovation may deliver both cost leadership and differentiation of customer value attributes. Sustaining this innovation advantage is vital because wants it gets into the general market, the business is forced into the differentiation or cost leadership trade-off. It may even find itself at a disadvantage if rival competitors improve the innovation specifically to lower costs or to create extra differentiation.

The Danger Of The Tempting Lure Of Differentiation And Cost Leadership

A business that achieves differentiation and cost leadership is in a very strong position and should be much the most profitable firm in the industry.

This is precisely why I believe that creating a strategy to achieve both is dangerous.

The lure is strong but so are the traps and being stuck in the middle remains a clear and present danger.

I agree with the conclusion Michael Porter came to in Competitive Advantage.

“A firm should always aggressively pursue all cost reduction opportunities that do not sacrifice differentiation. A firm should also pursue all differentiation opportunities that are not costly. Beyond this point, however, a firm should be prepared to choose what its ultimate competitive advantage will be and resolve the trade-offs accordingly.” (page 20 Competitive Advantage by Michael Porter)

The Value Chain And Competitive Advantage

The value chain was created to help businesses find competitive advantage and while the value chain can be criticised, the technique is very useful to look in detail at your business at the activity level and challenge each activity:

• How does this help differentiate our business from competitors in ways that matter to customers?
• How can we reduce costs in this activity without reducing customer value and service?

I was asked “Paul, what’s the difference between niche marketing and differentiation?”

I can understand the confusion because niche marketing and differentiating your business are related concepts but you can:

• use niche marketing principles and not be differentiated; or
• differentiate your business and not practice niche marketing.

Most of the time, successful businesses do both – they are differentiated within a niche market.

Let’s see how they do it.

Niche Marketing Concepts

Niche marketing means that your business focuses on particular types of customers or customer problems to the exclusion of other types of customers and problems.

It’s what I think of as bullseye marketing.

The aim is to attract customers who fit the characteristics of the bullseye in a target and the further a potential customer is away from the centre, the less mutual appeal. A customer from an outside ring isn’t interested in the business and the business isn’t interested in the customer.

The opposite of niche marketing is the problem I describe in Any Woman Will Do Says The Desperate Man.  This is casting the net wide and lacks any appeal to anyone – it’s the sign of desperate marketing.

Niche marketing is powerful because the specific needs of particular groups of customers are not being fully met by more general suppliers. Customers are being forced to buy products and services which are in the outer rings of the bullseye target because they can’t find anything better and buying is better than not buying.

Imagine you’re on holiday in a place where you expect it to be warm and sunny but when you get there, it’s cold and rainy. You may find yourself buying a coat and umbrella that don’t match your personal tastes. You wouldn’t buy them if you were at home and had plenty of time and choice but you don’t want to be cold and wet.

That’s quite an extreme example to make the point of buying “make do” products but if you consider what you’ve bought in the last few months, it may well have happened more often than you’d have liked.

The basic dimensions for establishing a niche market position are:

• Who is the target customer?
• What is the customer problem and what is the solution?
• Where is the business operating and where are the customers?

A niche market position requires a deliberate choice since it implies exclusion of customers outside the targeted area.

Many businesses only appeal to the local market because customers will only travel so far or it’s only economical for the business to travel a limited distance to customers. If all you have is a geographical restriction, then I don’t consider that you’re using niche marketing.

You can have a niche position with:

• a specific who and general what – clothes for teenagers
• a general who and specific what – hats
• a specific who and a specific what – hand made suits for male executives

These may or may not be restricted geographically. The development of e-commerce stores on the Internet has made many niche markets commercially viable precisely because the products can be sold throughout the world.

This concept of whether the niche is big enough is important and the bullseye target analogy is useful again. Market research may show the following likely sales:

• bullseye – £150,000  – no niche competition
• inner ring £750,000 – no niche competition
• middle ring £5,000,000 – two niche competitors
• outer ring £25,000,000

Imagine you’ve done your numbers work and you know that you need at least £500,000 sales to have a worthwhile business which is going to generate enough profit.

This clearly shows that the niche for the inner ring isn’t viable but the inner ring is and gives you considerable upside. It can be further extended by making small incursions with specialised products into the middle ring without destroying your position.

On the other hand, the £500,000 needed for a viable business might be right but your research shows you:

• Bullseye – £5 million – no niche competition
• Inner ring – £20 million

Here I’d say that your business opportunity looks good but I’d question whether you’ve really identified a bullseye. Your business may be vulnerable to being micro-niched.

Differentiation Concepts

Differentiating your business is about establishing clear reasons for winning buyer preference.

The biggest name guru on competitive advantage, Harvard professor Michael Porter made it clear that businesses can be:

• Differentiated in the wide market.
• Differentiated in a narrow, focused market – what we’d think of as a niche market.

Personally I think it’s much more natural to differentiate in a narrow market because you can precisely target the needs and wants of buyers.

Differentiation in broad markets is often based on either unique technology protected by patents, networking effects (thinks Windows for PCs as the de facto standard operating system) or brands.

People will buy an iPad or an iPhone because it is Apple. The basic product functionality may be very similar to other makes but the differentiating factor is the brand – “I want an Apple because my friends have an Apple and I want to be part of the in-crowd.”

They will buy a BMW car because of the prestige of the brand name and the image of the ultimate driving machine.

My blog is devoted to how to differentiate your business and you’ll see that I believe there are seven key dimensions to differentiation which you can get to by answering who, what, how, why, where, when and how many. Your answers need to be both multi-directional (e.g. who can refer to whom the customer is, who you are as the business owner, who the employees are, who the suppliers are) and specific (if you define your business with general rather than precise words, you’ll lose the power of any differentiation.)

The Difference Between Niche Market Positioning & Differentiation

The cross0ver is clear in the core questions:

Niche marketing is primarily about who, what and where.

Differentiation is about who, what, where, when, how, why and how many and takes a broader view.

You can be differentiated by staking out a clear niche position and you’ll appeal to bullseye customers e.g. think of a business expert who has identified his niche as marketing advice for accountants in the UK.

That’s very clear on the who, what and where and you can see that staff retention issues for financial advisers falls well outside the specification but it would fit a wider definition of “business advice for professional service providers”.

Any accountant who wants marketing advice is going to be attracted to the specialist. It’s a bullseye.

But what if the “marketing advice for accountants” is a big market?

It will attract new competitors who have a choice:

• Battling it out in the niche without any differentiation
• Differentiating by sub-niching and focusing on marketing advice for small accountancy practices with limited marketing budgets
• Differentiating by providing done-for-you marketing campaigns with a guaranteed return on investment of 500%

Having a niche may be enough to differentiate your business but you need to be looking for ways to go beyond it if a new competitor appears.

It’s no different from the shoe shop owner who makes a good profit in the town where he or she has a monopoly. The problems start when a new competitor moves in – and that may be another shoe shop or a supermarket superstore which sells shoes.

There has to be a clear reason for some customers to decide to buy from you.

My advice is to think “niche marketing AND differentiation.”

Harvard professor and world famous business strategist Michael Porter has a simple view to business and how you can generate superior returns from your business – the generic strategies –  but you can get stuck in the middle, not one thing or the other.

These ideas were introduced in the book Competitive Strategy by Michael Porter.

The Keys To Successful Competitive Strategy

Either:

1. Work in a business which is an attractive industry – this is a business that is well positioned against the five competitive forces that Porter identified (threat of new entrants, threat of substitutes, buyer power, supplier power and intensity of competition).
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2. Have a competitive advantage.

Michael Porter & The Generic Strategies

And when it comes to competitive advantage, Porter was equally simple because your competitive advantage can either be:

1. From being the lowest cost operator supplier acceptable goods and services at a reasonable price (and having the ability to beat anyone else on price if necessary)
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2. From winning buyer preferences based on providing a product or service which is differentiated.

Those two cost advantages can either be applied to the broad market or to narrow focused or niched markets.

The Danger Of Being Stuck In The Middle

Unfortunately many businesses fall into the trap of being “stuck in the middle” of the generic strategies of differentiation and cost leadership.

They don’t offer the high value for money and distinctive product or service that you get from a differentiated business.

And they don’t offer the low prices that can come from buying from the cost leader.

It happens because the business managers don’t know that they have to choose or think that they can be both.

Effectively being stuck in the middle comes from trying to compromise and it creates a muddle.

A muddle for your customers who don’t really know what you stand for or what to expect from you.

And a muddle for your employee who don’t understand the priorities of their work performance.

Other Stuck In The Middle Concepts

Stuck in the middle in this strategic context does not mean:

• Being in the middle of a value chain from raw material supplier at one end to end user of final product at the other. It can be uncomfortable being squeezed by big suppliers and big buyers but that’s even more reason to follow a cost leadership or differentiation strategy.
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• Nor does it mean being stuck in mid market between the premium priced luxury products and the low-priced economy brands although that can also be uncomfortable if it’s not clear what your business stands for. This mid market position is sometimes combined with Porter’s stuck in the middle concept but it is a big simplification of what he’s trying to say. There is no reason why a business can’t have a very distinct and differentiated product offering and charge mid market prices for example in cars, think of the Mazda MX5 sports car.

How A Business Gets Stuck In The Middle

A stuck in the middle position happens when a business designed to be low cost starts adding little extra frills which don’t add a corresponding amount to the customer value of a product.

The business suffers the cost, the customer doesn’t get the benefit.

Or when a differentiated business comes under pressure on prices – perhaps there has been a market disruption from new technology or an ultra low-priced competitor from overseas – and starts cutting costs in areas which damage the differentiation advantage.

What To Do If Your Business Is Stuck In the Middle

If you think that your business is stuck in the middle – or heading in that direction – then you need to get to grips with your business strategy.

You need to decide what your business is and isn’t.

You need to decide who your business will sell to and who it won’t.

You need to decide what your business will sell and what it won’t.

Strategy is about making wise choices and then having the courage and conviction to follow through and commit to turning words and ideas into action.

The Role Of The Value Chain In Creating Competitive Advantage

In his follow-up book, Competitive Advantage, Michael Porter introduced the concept of value chain analysis to help you to analyse, understand and create competitive advantage so that a business isn’t stuck in the middle.

The value chain is an important technique which helps you to focus on advantage based on differentiation or cost leadership.

Customer Value Analysis – both your position on the Customer Value Map and the comparison but your business and your closest competitors in the Customer Value Attribute Matrix -will help you to identify your strategic issues.

The next stage is to think about your strategic options.

Bowman’s Strategy Clock was introduced in my favourite book on strategy – Competitive and Corporate Strategy by Cliff Bowman and David Faulkner, a lost classic text.

What is Bowman’s Strategy Clock?

Bowman’s Strategy Clock is a generic diagram represent the strategic options a business has to move in the customer value map. This is the relationship between the price a customer is willing to pay and the perceived customer value available from the product or service. [continue reading…]

The Customer Value Attribute Map is an essential tool to help you focus on establishing and maintaining a competitive advantage based on differentiation (i.e being different in ways which matter to the targeted customers.)

It goes by different names:

• W. Chan Kim and Renee Mauborgne call it the Strategy Canvas in Blue Ocean Strategy, (This is probably the most famous of the names due to the popularity of the book.)
• Cliff Bowman calls it the Customer Matrix in Competitive and Corporate Strategy,
• I call a Customer Value Attribute Map (because I feel that’s the most descriptive) and
• others call it a Customer Value Matrix.

It doesn’t really matter what you call it as long as you use the basic concept to get crystal clear about what particular customer segments or niches want and what you and your closest competitors offer. This way you can see areas where you are better than them, where they are better than you and where one of you offers a unique attribute.

Just don’t confuse it with the Customer Value Map which shows the fair value line of value for money between low price, low value brands and high price, high value brands and where your business lies in relation to that fair value line. [continue reading…]

I introduced the concept of order winners and order qualifiers in my article on key success factors and now I want to delve into this important topic in more detail.

How Customers Chose To Buy Or At Least Rationalise Their Purchase Decisions – Order Winners, Orders Qualifiers & Customer Value

Customers make their purchasing decision emotionally and logically on a perception of customer value for money.The unconscious mind communicates the decision to the conscious mind at lightning speed and leaves the conscious mind to look for the logical reasons to back up the purchase decision. [continue reading…]

The full title of this book by Seth Godin is

Purple Cow: Transform Your Business by Being Remarkable

In my review posted on Amazon.co.uk, I gave it Three Stars.

Here is my review.

A powerful analogy but a disappointing book

I’ve developed a bit of a habit of reading Seth Godin and being disappointed. I find it with his books and his famous blog. He is an expert at marketing himself.

This is another book where I hoped I’d gain much more than was actually delivered. I’m fascinated by how businesses stand out from their competitors. I also think it’s an issue that is under developed in many companies. [continue reading…]