Differentiation helps businesses to stand out from the crowd and is a way of attracting clients to you and away from your competition. Differentiation allows a business to compete in areas, other than price, valued by the customer. This is the main alternative to operating on the cost leadership strategy mentioned in my previous article.
Those of you following these moments of insight that I like to share, will know this and my previous article, are inspired by Michael Porter’s Competitive Advantage, a concept that highlights the need for strategies to disturb the market and enable the business, regardless of industry or sector, to make money and keep it. I believe it is worth reiterating that this is the most important goal of any successful enterprise and liquidity depends on good cash management and efficiency.
Any business, primarily operating with a differentiation strategy will focus on the objective of providing benefits that add value in a different way to current products/services/experiences for consumers. This allows the organisation to charge a premium rate for their offering as the end user is prepared to pay extra for such appeal, thus enabling the attainment of greater profit margins. Successful organisations will often use their differentiation as a USP to help to get them noticed and as part of their competitive advantage will communicate this at every touch point opportunity.
Operating with a differentiation strategy requires a company to invest continuously in strong marketing capabilities enabling them to create brand recognition, which subsequently drives desire in their customers to become loyal advocates. In addition, they need to ensure they are financing research, progress and growth in developing a superior product (unique features, benefits, sturdiness, reliability) and/or service (professional, excellence, consistent, trustworthy). It is important for a business working this way to establish the charged premium price at a level high enough to cover the costs of creating the differentiating aspect. If this aspect is not highly regarded by the market they will end up with below average returns and the strategy will fail. Unlike the cost leadership strategy, however, differentiation allows a company to offer multiple products and services provided they are focusing on different attributes, Dyson are a shining example of this, from vacuum cleaners to their bespoke hairdryer, capitalising on a product that was reported as not having seen any meaningful innovation for decades.
Having a differentiation strategy allows you to stand out from the crowd and attracts the attention of would be customers, creating opportunities for craft messages and bespoke communications to the target audience who are keen have their needs fulfilled in a way that is better than anyone else can do.
Successful companies adopting differentiation as their strategy are those who can easily focus on innovation, whether this is introducing new products and/or services or improving their existing ones. Organisations effectively demonstrating such practice include Lush beauty products, who avoid the typical beauty market based image and packaging and instead sell on ethical points of view combined with purity and simplicity of delivery. Portmeirion tableware, nearly 50 years old and still a force in the tableware market, have established a reputation for producing timeless collection items of high quality and innovative design, suitable as a modern day living choice for the discerning homeowner and for the gift market. Whilst this approach is far more difficult for those who deal in mass-market products or standard commodities, as these broadly sell for the same basic price irrespective of where purchased there are opportunities. Morrisons, for example, chooses to differentiate on customer service and is known to employ specialist butchers, fishmongers and bakers to endorse and fulfil their strategy and Triodos Banking, a global pioneer of sustainable banking, declare their mission is to make money work for positive social, environmental and cultural change. Their values, principles and approach are certainly different to mainstream banking and undoubtedly differentiate them from the competition.
Even in bespoke markets, however, companies still have to stay one-step-ahead of trends and desires. The consumer now has so many options available to them, and they are increasingly demanding and informed in wanting to fulfil their needs, that this shortens the life cycle of the product’s appeal. The decreasing longevity of each iphone model is testimony to such pressure and any brand that fails to recognize this is increasing their risk of failure. Examples of such failures are evident from Sony’s flop with Betamax versus VHS, Amazon’s flash-in-the pan fire phone and McDonald’s attempt to attract a more sophisticated market with their Arch Deluxe Burger deal. None of which succeeded and resulted in these featuring in Business Insider’s article on “25 of the biggest failed products from the world's biggest companies”. Furthermore, any business that experiences a decline in quality will struggle to survive in today’s markets where, once an essential component to boast about, quality is now expected as a basic entitlement, especially when a premium price is charged.
The obvious benefits of differentiation are multifold:-
- Increased income – the premium price paid to the differentiating business escalates revenue
- First mover advantage - may gain market share that is hard to compete against by being the first to market with a unique offering
- Barrier to entry – it may be that your offering is protected by patent, meaning a period of luxury to reap profit and recoup investment
- Brand loyalty – your brand becomes associated with value
- Premium price – higher margins meaning higher profits capable of being reinvested into developing further value-add offerings
- Wealth generation – sound commercial growth for the benefit of the business owner, the board and the stakeholders
There is of course, always the risk that today’s success will be tomorrow’s failure but for businesses who are alert to changes in consumer trends, innovation and emerging markets there is the comfort that such focus will hopefully ensure they stay ahead in the delicate balance of maintaining sufficient cash reserves to weather such changes and endure any negative impact.
Of course, such tenacity requires 100% focus to show the company understands and services their target market better than anyone else, but as this now leads us into the third strategy of competitive advantage I will leave this discussion until next time.