Tuesday, May 27, 2014

Is Differentiation a Strategy

The real strategic differentiation is to create true value, look forward, not backward, and present the advanced uniqueness to shine through.

Today’s digital business environment is unprecedentedly dynamic, complex and uncertain. There are always players starting with different resources and competitive position. And there are always different complexities at a different time. Thus, the organizations have to build the two sets of business capabilities: The competitive necessity and competitive uniqueness. There are many sources of differentiation. Differentiation just for the sake of being different isn't a strategy, it's a tactic. The real differentiation is to create true value, look forward, not backward, and present the advanced uniqueness to shine through. The question of whether differentiation is the best strategy has to be answered case by case.

From a customer perspective, if you are not different, you are a commodity: Assuming the company has a great product, creating meaningful, relevant, and compelling differentiation in the mind of customers is the challenge. This is the foundation in which brands are built. This is the strategy that "helps" to protect the brand and products from the low-priced competition. The best strategy is to win extreme levels of customer loyalty. Differentiation may be a start if the result is beautiful products and services. But building loyalty requires much more. It is an emotional journey. And today's customer is not willing to pay more for a commodity. If you can't differentiate from the customer perspective, you must be much more operationally efficient, it is hard with things changing so fast. Worse, your competitors may differentiate - and that will kill you quickly.

More often, technology is a differentiator and creative disruptor: The differentiation provided by innovative technology usually is more long-lived than differentiation provided by marketing actions that can be copied easier. It just means that opportunities for cost-leadership as a strategy are now much harder as everything moves so much more quickly. At the same time, the differentiation provided by innovative technology allows companies to reach the "long-tail" customer that previously was impossible or uneconomic. And technologies can push you out of business if you are not agile enough to change your business model. Today, cost leadership depends on being proactive and having technologies that cannot be copied - to keep costs down, differentiate operationally if not in marketing. That's why a lot of conventional management talks about doing both - hybrid vs. stuck-in-the-middle strategies. You need to keep costs down and aim for cost-leadership. However, you also need to ensure your customers see you as a differentiator.

Decisive Competitive Advantage (DCA) is a sustainable differentiation. Differentiation is an effect accomplished by having a sustainable decisive competitive advantage (DCA) to the market, rooted in operational excellence which makes it difficult or even impossible for competitors to imitate. This creates a difference. Cosmetic differences or the differences which can be easily copied or surpassed by competitors should not be the essence of a strategy. Instead, building and sustaining a DCA should be the essence of developing a strategy. Sometimes people tend to confuse the differences between a strategy, its direction and the appropriate strategic moves the organization makes in the midst of available alternatives.

Differentiation is not the end game, value creation, and forward vision are: For most of the businesses, the end game is to maximize the economic value of the company over the short, medium or long term, but even then there are plenty of organizations for whom this is not the end game. Also, the value is a multi-dimensional term, besides financial value; there are utility value, customer value, and social value as well. In classic strategy, differentiation is an option that must be chosen in function of the competitive forces of the market and the internal competencies. The assumption here is that while complexity increases differentiation requires stronger internal competencies that only a few organizations own and other ones do not.

One size cannot fit all: Competitive differentiation will be essential in some sectors and less important in others, and in some areas of the business and less so in others. One size cannot fit all. If you have a commoditized product in a highly competitive marketplace, then differentiation strategies may be more important to you, rather than if you have a niche service with few or no competitors. For many companies, it is increasingly difficult to differentiate from their competitors, at least partly due to various factors caused by globalization, and there is an increasing reliance on technology to provide differentiation and to speed up innovation.

It takes strategic differentiation to overcome complexityWe usually consider as complex a system that can be difficult to control due to an excessive number of variables to take into account, and it is usually working under a lot of uncertainty. When we are talking about business or economy, this can be considered the regular case, although there are some businesses or economies more complex than other ones. The complexity of an economy (its possibility to be managed) changes over time. The complexity of most systems tends to increase, and when the system becomes unmanageable, the system collapses. Although you think that you can control your own variables, in a complex economy, your organization is linked to other systems that can be excessively complex, and they can make your strategy ineffective. Therefore, the strategists must be aware of the problems that complexity is introducing in their activity, and they must use different approaches and methodologies to analyze markets when they are selecting the proper strategy.

Differentiation is one of the many strategic options in generic strategies available to any business, but thinking that differentiation is always good and you have resources enough can be a great error. You have to plan it right and make it a true value differentiator from a different perspective.


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