Note: This article is an excerpt from my new book, STRATEGIC: The Skill to Set Direction, Create Advantage, and Achieve Executive Excellence.
“When you’ve got only single-digit market share and you’re competing with the big boys, you either differentiate or die.”
Michael Dell, founder, Dell Technologies
The words of Michael Dell may seem alarmingly harsh. After all, there are plenty of examples of products and services that aren’t much different from their competition that are still around. The question is, for how long? A study of 25,000 companies during the past 40 years found the companies that focused on differentiation were in the top 10% in return on assets. As Peter Thiel, co-founder of PayPal wrote, “All happy companies are different. All failed companies are the same. If you want to create and capture lasting value, don’t build an undifferentiated business.”
Observe the companies that are struggling today and it’s a good bet one of the reasons is their failure to differentiate their offerings. They are stuck doing the same things in the same ways as their competition. Think of prominent companies that went into bankruptcy and their close competitors: Circuit City and Best Buy; Borders and Barnes and Noble; Sports Authority and Dick’s Sporting Goods. When a company continually fails to differentiate their offerings from competitors, sooner or later, they’re going to be someone’s lunch.
This failure to differentiate is often due to a propensity for operational effectiveness. Operational effectiveness is the wolf in strategy’s clothing. The majority of companies in nearly all industries are constantly fighting battles of operational effectiveness: trying to do the same activities in the same tactical ways as others. When companies fall into this trap and rely on doing the same things in the same ways as their competitors (e.g., taxis and limousines), differentiated entrants come into the marketplace and begin to take their business (e.g., Uber, Lyft). Authors Michael Raynor and Mumatz Ahmed share insights from their study of 25,000 companies: “The more you compete on price, and the less differentiated you are on non-price dimensions, the less likely it is that you’ll achieve exceptional outcomes. More compelling still, when an exceptional company abandons ‘better’ for ‘cheaper,’ its performance often suffers.”
The auto industry serves as one example where competitive convergence has been the norm. Enter Tesla. It shot to the top of Forbes Magazine’s World’s Most Innovative Companies list due in large part to its’ differentiated approach and offerings. Starting at the high-end of the automobile market, it introduced the Roadster, the first electric sports car and then the Model S, an electric luxury sedan. They currently produce the top two bestselling electric cars in the U.S. according to Automotive News in the Tesla Model 3 coming in at number two and the Tesla Model Y compact SUV coming in at number one.
Tesla has used a different approach than other auto makers to gain traction in the market. They bypassed the traditional automotive dealerships and have created 222 Tesla dealerships in the form of galleries and stores and sell directly to customers via the internet and non-U.S. based stores. Traditional automakers outsource around 80 percent of components to suppliers, whereas Tesla’s vertical integration, including component production, is roughly 80 percent. While their electric car competitors use single-purpose, large battery cells, almost half of all Tesla cars are equipped with prismatic lithium iron phosphate batteries and they have started their own battery production. They also built all the software used to run the cars from scratch, instead of the customary outsourcing.
Tesla also benefits from CEO Elon Musk’s other venture, SpaceX, an American aerospace manufacturer. Tesla has borrowed from SpaceX’s techniques of extensive use of aluminum for the Model S body and chassis, in addition to casting and drawing designed to produce the bodies of the SpaceX’s Falcon rocket and Dragon capsules. Tesla’s differentiated approach and offerings have resulted in both financial success (U.S. leader in sales of electric vehicles) and customer delight (#1 in Consumer Reports’ Annual Owner Satisfaction Survey). As Michael Porter, professor at Harvard Business School said, “There is no best auto company. There is no best car. You’re really competing to be unique.”
Do you think your offerings are unique? More important, do your customers think they are unique? According to research, the answer is, “probably not.” One study showed 80 percent of executives believed their offering was highly differentiated, but only 8 percent of their customers agreed with them!
It’s important to remember that the differentiation starts in the allocation of resources. It’s often the configuration of resources in different activities or different ways that is the genesis of product or service differentiation, which leads to innovation. Research shows that companies tend to allocate 90 percent or more of their resources to the same places year in, and year out. Allowing a status quo mindset to limit your reallocation of resources is one of the greatest threats to your company’s profitable growth.
Take a moment and answer these five questions related to differentiation:
1. What are the truly different activities we perform than the competition?
2. What are the similar activities we perform in different ways than the competition?
3. How is our business model different from the competition?
4. What resources do we have that are different than the competition?
5. What is the primary differentiated value our offering provides to customers?
Good strategy demands differentiation, which means trade-offs: choosing one path and not the other. Companies trying to be all things to all people are the easiest to beat. The mark of a great company is that their differentiation creates trade-offs that competitors cannot or will not meet. Develop the discipline to differentiate, or risk becoming irrelevant.