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The discipline to differentiate

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How Differentiation Can Make or Break Your Business

Note: This article is an excerpt from my new book, STRATEGIC: The Skill to Set Direction, Create Advantage, and Achieve Executive Excellence.

“If you only have a single-digit market share and you’re competing with the big boys, you differentiate or you die.”
Michael Dell, Founder, Dell Technologies

Michael Dell’s words may seem alarmingly harsh. After all, there are still plenty of examples of products and services that are not much different from the competition. The question is: for how long? A survey of 25,000 companies over the past forty years found that those that focused on differentiation were in the top 10% in return on assets. As Peter Thiel, co-founder of PayPal, wrote: “All happy companies are different. All failed businesses are the same. If you want to create and capture lasting value, don’t build an undifferentiated company.”

Why Differentiation Matters

Look at the companies that are struggling today and one of the reasons is likely that they are failing to differentiate their offerings. They’re stuck doing the same things the same way as their competition. Consider leading companies that have gone bankrupt and their closest competitors: Circuit City and Best Buy; Frontiers and Barnes and Noble; Sports Authority and Dick’s Sporting Goods. When a company consistently fails to differentiate its offering from the competition, sooner or later it will be someone’s lunch.


Image Source: strategyskills.com

Understanding Strategy vs. Operations

This inability to differentiate is often due to a bias towards operational effectiveness. Operational effectiveness is the wolf in strategy’s clothing. The majority of companies in almost all industries are in a constant battle for operational effectiveness: they try to perform the same activities in the same tactical way as others. When companies fall into this trap and depend on doing the same things in the same way as their competitors, differentiated new entrants enter the market and take over their businesses. Authors Michael Raynor and Mumatz Ahmed share insights from their research of 25,000 companies: “The more you compete on price, and the less differentiated you are on non-price dimensions, the less likely you are to achieve exceptional results.”

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Strategic Differentiation in Action: The Automotive Industry

The automotive industry is an example of where competitive convergence has been the norm. Enter Tesla. It shot to the top of Forbes Magazine’s list of most innovative companies in the world largely due to its differentiated approach and offering. Tesla’s unique strategy, including direct sales to customers, vertical integration, and innovative battery technology, has set it apart in the market. This differentiated approach has led to financial success and high customer satisfaction.

Tesla’s success serves as a reminder that differentiation is key to creating a competitive advantage in any industry. As Harvard Business School professor Michael Porter said, “There is no best car company. There is no best car. You really compete to be unique.”

Creating Competitive Advantage Through Differentiation

It is important to remember that differentiation starts with resource allocation. Research shows that companies spend 90 percent or more of their resources on the same places year in and year out. Allowing a status quo mentality to limit your reallocation of resources is one of the biggest threats to the profitable growth of your business.

Take a moment and answer these five questions related to differentiation:
1. What are the activities that we carry out that are actually different from the competition?
2. What are the similar activities that we perform in different ways than the competition?
3. How does our business model differ from the competition?
4. What resources do we have that are different from the competition?
5. What is the key differentiated value our offering provides to customers?

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Good strategy requires differentiation, which means compromise: choosing one path over another. Companies that try to be everything to everyone are the easiest to beat. Develop the discipline to differentiate, otherwise you risk becoming irrelevant.

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