In March 2018, I spent a week at IMD in Switzerland completing a joint IMD and MIT program; ‘Driving Strategic Innovation’.
A memorable afternoon was spent on the topic of differentiation and it was exceptionally insightful.
My key takeaway was when assessing your point of difference from your competitors, be careful not to look at the differentiation now, as this can change quickly in a digital world. You must consider if or how your differentiation can be sustained.
Applying traditional frameworks is outdated. A digital context now needs to be considered. There’s a framework developed by Duncan Simester at MIT that can help with this.
Some parts of the framework may seem obvious; however, they shouldn’t be glanced over. It’s important to assess each component of differentiation before determining the action.
Here are the six factors to assess:
Cost Advantages
Before considering if you need to be at the lowest cost, you need to determine - is this critical?
If you can differentiate, you may not need to be at the lowest cost. A cost advantage is important in markets where there are no other sources of differentiation.
Is being the lowest cost sustainable?
Brand Differentiation
Brands are different in different markets. Customers can now search for differentiation.
If there is differentiation, it’s based on the actual product or service and not the brand itself.
Relationships
Relationships are a common source of competitive advantage. Upstream and downstream, from suppliers to distributors, retailers or customers. Some of these are co-owned, some exclusive (like the rights to something) and the strongest is control.
What are your relationships?
Who ultimately has control?
Human Capital
Human capital is possibly one of the most overrated resources; it’s also one of the most dangerous. Success sometimes is attributed to people and not circumstances.
Sometimes markets are entered early and there is success - can this be scaled?
Also is your market narrow and success has been sustained because it’s narrow?
Factors beyond human capital must always be considered.
Switching Costs
Switching costs are possibly the most undervalued resource and are the area I found rather interesting.
There was a control study of two retailers who contacted their competitors' most loyal customers. Those competitors who targeted a retailer's own customers made customers more loyal to that retailer by driving up sales of their product.
Switching costs are about the ease of doing business. Ease of ordering and transacting makes customers more sticky.
The one-off switch that requires a big effort can lock customers in. So if a customer decides to switch, this could make them stick around for a while.
You want a sticky group of customers, also you want your competitor to have a sticky group, as this can help alleviate price competition. Your greatest risk in this scenario is a new entrant at a lower price.
Market Share
Market share can represent past differentiation and may also represent future differentiation.
Can the past make it easier to satisfy future customers?
If there is a “switching cost”, then the past market might be a strategic resource in the future.
Learn more about this in my book Digital Is Everyone's Business.