Last week, we decried that hollow bit of strategic advice, “differentiate.” So obvious as to be trite, so natural as to be assumed.
But for all its obviousness, differentiation is essential … and difficult.
Unfortunately, too many of us in the strategy world argue stridently about what is meaningful and “strategic” differentiation. It’s a wasteful argument and deters organizations from the hard work of building meaningfully different and hard-to-copy franchises.
As I said last week, differentiation has to happen on at least three different levels: Territorial, Economic and Propositional.
Territorial Differentiation
The territorial level is the highest and most classic differentiation and involves two critical questions. To paraphrase the Monitor or Michael Porter “Choice Structuring” approach: Where are we going to go to market? And how are we going to convince customers to buy our stuff instead of the other guy’s? (See Roger Martin’s and AG Lafley’s book.) How you answer these questions are termed “positioning” choices. (The “Blue Ocean” types are essentially talking these same choices, suggesting the key is to make territorial choices that “hit ’em where they ain’t.”)
The territorial choices you make imply equally specific options you will NOT pursue:
“We are going to sell in urban centers through distributors; We are NOT going to sell in rural areas through mass merchants. We are going to sell to Fortune 1000 firms; We are NOT going to sell to mid size manufacturers. We are going to sell on price; We are NOT going to sell on quality.”
The problem, of course, is that the number and value of “positioning choices” diminish as the business grows. The bigger you get, the fewer there are. An entrepreneur can be very precise about customer selection. But a large multi-national that already owns big market share positions, can’t make many “different” choices. Their oceans are red indeed!
To be fair, classical Choice Structuring does try to concentrate on the “customer value” element … how you position yourself to “win”. But the process tends to simplify the process of designing a competitively meaningful business model, let alone digging down to the work required to ensure the firm’s products and services are distinguishable from others.
Business Model Differentiation
Business model differentiation … what I also term “economic” differentiation … is the one we see so often in high tech but tends to get short shrift in more traditional venues. Many traditionalists will say that “strategy” and “business model” are different things. But dismissing the strategic elements of business model design, or trying to narrow the work to very specific transactional choices (i.e., your price position, or whether to outsource certain functions, etc.) cuts off some of your best opportunities to create real competitive advantage.
Business model design (or redesign) is really an essential element of a strategy.
The core idea is to put under the microscope the way customers transact with suppliers … of re-engineering how profit develops. Adrian Slywotzky wrote a lot about how business models capture value in the ’90’s. The Profit Zone should be required reading.
High tech has been all about changing the way money moves. Typically, they have used digitization to disaggregate value chains. Amazon removes the bookstore, the inventory, the marketing, and the cost of intermediaries. Uber crashes the licensed taxi monopoly. Ebay creates a virtual but liquid marketplace and, in so doing, eliminates seller’s opportunity costs.
Large, incumbent firms can dance too! I just did a war game where the large multi-national client sold each of its equipment lines as stand alone franchises, marked by a quality and performance story backed up by high reputation selling. The client was starting to have real problems with one specific competitor.
That competitor, also a large multi-national, was beating my client by portfolio selling: Cracking accounts with “loss leaders” and sample kits and steadily adding more profitable and specialized items. In addition, the competitor was changing contract terms and metrics in ways that changed how customers perceived and measured value.
Purists might argue these are just different selling tactics. But the competitor’s approach is comprehensive, sophisticated and changing customer behavior. The competitor is capturing value is a different way, on a different time-line, and making bank on the bet that my client would find changing its ways too costly to effectively counter them.
The competitor’s choices are the essence of strategic!
Proposition Differentiation
The third level of strategic differentiation is propositional. How is the specific product or service different?
The battle lines on propositional differentiation are sharp. Tech minds and innovation pundits see it as essential and elemental. On the other hand, strategy mavens will often say it is not enough. Too few inventions and technologies have the power to sustain competitive advantage. They can be readily copied or mitigated.
(Funny how the naysayers don’t see the disconnect in their argument. Product and service innovations that force efforts to match or overcome … that drive change … sound entirely strategic to me!)
Product and service differentiation is complex and can be fleeting. But it is how most businesses come into existence. The problem -and a very strategic one- is how to keep it going. This problem drives entrepreneurs while it constantly trips up and diminishes the innovation capability of large firms (see Innovator’s Dilemma).
No amount of high level “fixing” can overcome the dilemma. Firms cannot do “one and done” on their “better than” proposition. They have to work out lines of innovation. Once they establish their “better” product or service, they have to start mapping out the next iterations and improvements. Then they have to marry these innovation lines to their business model and territorial decisions.
Some times the higher level choices are about protecting and extending the value created by propositional elements. Keeping competition out.
Other times they are about enabling and exploiting propositional elements. Taking on competition.
Bottom line, the greatest business strategies happen when firms differentiate on all levels: They differentiate in terms of the territory they stake out. They are different in how they capture value. And then they ensure the nature of their product or service causes customers to say “wow.”