By Robert W. Bradford, President and CEO
One of the things we strive for in our strategies is good differentiation. As a key dimension in strategic competency (the other is value to the customer), differentiation is what makes both specialty and commodity strategies work. With a specialty strategy, the differentiation must help target customers to decide that our product or service is worth a premium price. In a commodity strategy, our differentiation is what enables us to succeed at a lower price point than undifferentiated competition.
The fact that these types of differentiation are so distinctly different from each other creates incredible confusion about appropriate strategies in many industries. Simply put, if you are seeking specialty differentiation, the customer must perceive the added value. If you are seeking commodity differentiation, the customer already perceives value in the price – but you must have an actual cost advantage over your competitors that sets you apart. In other words, customers can be totally unaware of your advantage – but, for a commodity strategy, it must be real, and create a tangible cost advantage.
In many industries, the lack of clear commitment to specialty or commodity strategies leads people to strategic plans with highly incompatible objectives. Cutting labor costs, for example, is often damaging to specialty differentiation (especially in service businesses) because your workforce is often either the source of your competitive advantage or an important part of delivering the value of your advantage to customers. This is one of the most important reasons why we strongly encourage companies to clearly identify whether they are pursuing specialty or commodity strategies.
This being said, what does good specialty differentiation look like? Since it must be perceived by the customer, it cannot be a subtle distinction. The more you have to explain your differentiation to customers, the less believable it is. This means that the best differentiation is simple and clearly communicated. If you need a lot of words to describe it – or if you have difficulty explaining it to customers – chances are, your differentiation isn’t very good.
Specialty differentiation also has to deliver a promise of clear value to the customer. This means that the customer must expect that there is some desirable benefit he or she will receive as a consequence of buying from you. In our experience, each specific customer has a limited number of values that are important, and they are rarely always the same. This is why some auto customers buy SUVs while others buy sports cars. It’s also rare that the customer has a very long list of value benefits that are important. Normally, customers will make their primary decisions based on three to five key value dimensions, such as convenience, appearance, reliability or ego association.
With commodity differentiation, we tend to look internally for distinctive practices or technology that reduces cost below those of competitors. This is far more difficult for many than specialty differentiation, but it’s easier to recognize and quantify. The easy part of commodity differentiation is that your accounting systems can probably tell you exactly what your costs are – but the hard part is having true differentiation, where you have a cost advantage that competitors cannot (or will not) copy.
What does your differentiation look like, and how do you know it’s there?
Does your company have a strategy with good differentiation? Is your company having a hard time developing your strategic plan or thinking strategically? Let us know how you are dealing with it – or, better yet, attend our amazing, data-driven workshop on Simplified Strategic Planning to learn how to develop and implement your strategic plan. Our highly acclaimed Simplified Strategic Planning approach has helped many hundreds of organizations improve their strategies and bottom line results with effective, actionable strategies.
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