©2019 by David J Banger | Founder CHANGE lead ® 

Switching costs is how to differentiate (MIT and IMD insights)

Updated: Mar 8

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 here are my rough notes.


When assessing your differentiation from your competitors, be careful not to look at the differentiation now, as this can change quickly in a digital world. Consider if or how your differentiation can be sustained?


Applying traditional frameworks is outdated. A digital context now needs to be considered and a framework developed by Duncan Simester at MIT can help. Some parts of the framework may seem obvious; however, they should not be glanced over, it is important to asses each component of differentiation before determining the action.


Einstein was reported to have said that if he only had one hour to solve a problem, he would spend 55 minutes defining the problem and the remaining five minutes solving it. Annual strategy cycles are outdated and being in a state of action frenzy of “working in” rather “on your business” is also not the answer. Strive for a greater consciousness to think more regularly "on" your business and the market, there are 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 is 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 is 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 as it is 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 targeting a retailers own customers made customers more loyal to that retailer by driving up sales of their product.


Switching costs are about the the ease of doing business. Ease of ordering and transacting make 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 past market might be a strategic resource in the future.


Some further anecdotes:

  • The extent of a positive external network that is used by others and for you to interact effectively with them you have little or no choice but to align

  • Strength of a brands past can drive future success; however, this probably needs to be supported by an expert endorsement.


Picture is of David Charles Fine (MIT) and Bill Fischer (IMD).