In the early 1980s, Bruce Henderson, founder of Boston Consulting Group, drew a correlation between competition in business and biological organisms.
A concept he extrapolated from Gause’s principle of competitive exclusion which states that two animals of the same species attempting to live together within the same environment will not survive.
This principle buttresses the need for differentiation of species, and the same dynamics exist in business competition.
At the heart of every enterprise is the need to stay relevant in the minds of the market they serve by constantly coming up with innovative ways to meet consumer needs, and that’s because basic economics teaches that the forces of demand and supply must be present for a market to exist.
The greater the demand in any given market the more opportunities become readily available, which in turn makes the market attractive to other players who compete for market share.
What I have described is a typical scenario of how competition is birth in any lucrative market, and every business (including yours) would face this at some point in time if growth is your priority..
Regardless of the market, you’re in, you’ll agree that it takes more than just a great idea or product for a business to stay relevant over a period of time. It requires a strategy that is dynamic (and not static).
And the #1 strategy that you can deploy in your business is the strategy of differentiation.
Most businesses fall behind simply because they don’t understand how to harness this simple, yet powerful concept.
Differentiation is more than just having a product or service that no one else has or offers but also about creating synergy on all activities within your business to give a unique value proposition that your target market can’t resist.
In my work as a consultant, I have found that there are three categories of businesses:
- The first, have no idea what their differentiating factor is,
- The second, have an idea what their differentiating factor is but don’t know how to clearly articulate it and harness it to their advantage,
- The last category, know what makes them different and constantly communicate it to their target market.
Not very many businesses make it to the third category, and the goal in this post is to help you unlock and explore the true potential of your business by provoking a different thinking pattern.
And that only happens in the last category.
Because, If you’re going to build a great business then you must get used to the idea of giving your business a competitive advantage, and the strategy of differentiation is the key to the vault.
A good example would be the Cola war.
The conflict between these giants is viewed as one of the oldest brand rivalries in the history of business.
Coca-Cola was founded in 1886, while Pepsi was founded in 1893. Both companies compete in the same industry, for the same target market, with almost similar products.
And yet they are both global leaders with billions of dollars in revenue.
In 2020, Pepsi generated revenue of about $70.37 billion, while Coca-Cola generated revenue of $33.01 billion.
Sounds interesting…but think about it.
How is it possible that these mega-brands can co-exist within the same market for the same consumers for over a century?
The answer is simply connected to the Strategy of Differentiation.
To get a little perspective of the concept, you have to appreciate the fact that market size and consumer behaviour define the opportunities a business can leverage to drive growth and that’s because business growth is directly proportional to market growth.
In the case of the Cola giants, we’ll take a look at the size of the global beverage and carbonated beverage market…
The global beverage market is valued at USD 1.5 trillion in 2019. The market size will reach USD 1.69 trillion by the end of 2026, growing at a compound annual growth rate (CAGR) of 1.7% during 2021-2026.
The global carbonated beverage market was estimated at $406.89 billion in 2019 and is expected to grow at a compound annual growth rate (CAGR) of 5.1% from 2020 to 2027.
Now, imagine what a 10% market share or more would represent in revenue.
Impressive…right?
This sets forth a fundamental rule that no particular business can outgrow its direct market, and for the businesses to achieve rapid growth there has to be significant growth within that market or expansion into multiple large markets.
But, most importantly the core elements in the Strategy of Differentiation is audience appeal and trends and it applies to all business rivalries that exist; this is the ability to connect your products or services to your target market on an emotional level.
And this communication is why Coca-Cola is different from Pepsi and vice versa.
Moreover, this is the reason why they constantly invest heavily in emotion-driven offline and online marketing campaigns about their products that engage and connects with their target market whilst reinforcing their differentiation.
PEPSI AD
COCA-COLA AD
This rivalry is not peculiar to the Coca-Cola and Pepsi alone, but also within so many other industries with brands that are market leaders such as Apple and Samsung, Nike and Reebok, Boeing and Airbus, McDonald’s and Burger King, Amazon and Walmart, Netflix and Disney+, GM and Ford, Blue Origin and SpaceX the list is endless.
But when you carefully analyze each company, you’ll notice the Strategy of Differentiation at play.
What is the Strategy of Differentiation?
Strategy of Differentiation is basically the process of defining the x-factor either internally or externally within your business in offering value and communicating it to your customers with the sole purpose of setting the business apart from others within the same industry as a superior and preferred choice.
In defining the strategy of differentiation, you must understand that there is a difference between value and the perception of value. The former focuses on your product or service while the latter focuses on the market’s perception of the derived value, and this is most important.
Check out these Volvo Ads
One message is consistent and unique in all the campaigns, and that is SAFETY.
Volvo offers safety as a differentiating factor and communicates it to its target market as its unique value proposition because its target market perceives the intrinsic value of safety more important than the practical value of a car.
Why the Strategy of Differentiation is the Holy Grail of Business Growth
To begin the process of defining your Strategy of Differentiation, you must understand that it begins with a mindset of what you think is possible outside of the industry norm. In other words, it is the ability to think differently about everything you do and the value you bring to the market.
This simple fact is the difference between winners and losers.
In the 1990s and early 2000s, Blockbuster was an industry leader in the movie rental market. At its prime in 2004, Blockbuster had 9000 global stores and revenue of $5.9 billion.
However, within the same period, Netflix was founded to serve the existing market that Blockbuster was actively engaging by offering rent-by-mail DVD service.
In the mid-2000s, Netflix began to notice a dwindling demand in DVD sales and switched to a subscription business model, and began streaming movies, but Blockbuster didn’t make that move because they were “successfully stuck” as a market leader.
By 2010, Blockbuster stores had filed for bankruptcy and down to 600 stores the following year while Netflix continued to grow in popularity.
At the time Netflix made the decision to stream movies on the internet, the demand for streaming was unpopular but Netflix’s differentiating factor was to revolutionize content distribution by eliminating the friction consumers face in accessing unlimited entertainment.
In essence, they positioned themselves ahead of the trend and when the tide came in, they experienced rapid growth. The strategy of differentiation is an innovative and customer-centric way to assess the customer’s needs and associated trends and align it with your offer.
However, to make this paradigm shift your business must have a thorough evaluation of the competitive nature of its market by leveraging Porter’s Five Forces Framework, to understand the forces at play within that market that may present an opportunity or pose a threat to the business.
The connection between Porter’s Five forces and the Strategy of Differentiation
According to Michael Porters, there are five forces that exist within a given industry that shape competition as well as have a direct impact on the profitability of the businesses within that industry.
The strategy of differentiation a business must engage must be dynamic enough to address and mitigate the threats the five forces could pose to that business.
Industry Rivalry:
As in the case of the Cola wars, the intensity of the rivalry between industry leaders has an effect on the other businesses in that industry. Businesses, therefore, need to devise a unique strategy to increase market share and profitability.
Threat of Substitutes
In June 2021, Coca-Cola lost $4 billion in market value when Cristiano Ronaldo removed two bottles of Coca-Cola from a Euro 2021 press conference. That harmless gesture buttresses the fact that water is a clear substitute to carbonated drinks. Thus, the presence of substitutes to products or services offered by businesses within that industry could pose a threat to profitability.
Threat of New Entrants
The presence of new entrants in an industry could have an effect on the dynamics of that industry, especially if the entrants have a strong market share and brand identity in another industry, customer base, and cash flow.
The higher the barrier to enter an industry, the lesser the threat, and the lower the barrier to entry the more intense the threat becomes. Amazon has succeeded in entering numerous industries as a result of the strong brand presence and cash flow, thereby posing a major threat to the businesses within those industries.
Bargaining Power of Supplier
Monopoly in supply of raw materials could hold a business ransom to boycott or excessively high prices that could threaten the sustenance and profitability of the business.
Apple has exclusive contract agreements and majority shares with various suppliers and manufacturers to hedge such risks to their supply chain, such control enables them to command premium prices on their products hence boosting profitability.
Bargaining Power of Buyers
The presence of alternatives within a particular industry could cause consumers to command lower prices on goods and services offered by businesses within that market. On the other hand, this process can be manipulated by competitors to lure consumers to their products or services at ridiculous price points that their rivals can’t keep up with or increase market share.
In 2010, Amazon launched a price war on Diaper.com by crashing the price of Diaper.com which led to the sellout of the business for $545 million to Amazon. However, Amazon shut down the business in 2017.
The attractiveness of an industry is determined when the effect of all the forces increase overall profitability for all businesses, on the other hand, the unattractiveness of an industry is also defined by the reduction in overall profitability
Defining your Strategy of Differentiation
In defining your strategy of differentiation, you have to consider a number of areas in your business value chain in relation to delivering value and superior positioning to your target market. It is important to also note that some businesses combine two or more of these differentiating factors to further increase your competitive edge.
Product Differentiation
This focuses on distinguishing your product from others with the same category through a number of ways such as features, warranty, durability, reliability, or performance. In many cases, this is the most visible differentiating factor and is easily imitated.
Apple sets its products apart through great designs and features, allowing them to attain good brand positioning and profit margins by commanding high price points that other alternatives in the marketplace can’t refute.
Service Differentiation
This focuses on setting your business apart through a unique model of service delivery such as ordering ease, delivery, installation, customer training, or customer service.
Zappos set itself apart as one of the best online shoe stores in its category not only with great products but with excellent customer service by adopting a customer-centric corporate culture.
Distribution Differentiation
This focuses on gaining a competitive edge through the mode of getting your product or service to your customers through a number of ways such as coverage, expertise, or performance.
Uber set itself apart by creating a business model that enables a strong network of drivers that offer ride-hailing services to customers through their app across the world. According to Uber, some 3.9million people work as drivers in 3 countries, completing 14 million trips every day.
Relationship Differentiation
This is a great way of differentiating your business through establishing a more personalized emotional interaction with the customers through a display of competence, credibility, courtesy, reliability or responsiveness.
Disney is one business that has established a good relationship differentiation through their theme parks and movie characters that engage and creates an unforgettable experience with their customer that keeps them coming back.
Image/Reputation Differentiation
This primarily stems from a strong brand built over many years by a show of competence in a particular area or a number of areas through perception, communication or advertising.
Amazon has built a strong brand presence over the years that can be intimidating to potential new entrants as well as incumbents in any market they play in or wish to play in.
Price Differentiation
This differentiation approach leverages price as an edge over the competition. It focuses on selling a product or service to a customer at varied price points and is based on the notion that the value of a good is subjective to a number of factors such as customer, segment, quantity, or environment.
Walmart has built a very strong and strategic leadership in its category based on the price that gives them an almost unfair competitive advantage over other businesses in the same space.
In conclusion, building a successful business takes effort and critical thinking across several areas within your value chain to enable exponential growth. This is a process, not an overnight sprint.