I had a recent conversation with a business and the topic of differentiation came up. Why differentiate? Many businesses struggle with differentiation and it has deep consequences and benefits.
Harvard professor Michael Porter the leading authority on differentiation and gaining competitive advantage, summarises that business can be:
- Differentiated in the wide market (e.g. technology – G4 or brand – Apple)
- Differentiated in a narrow, focused niche market.
There is confusion between niche and differentiation and a niche is defined by answering:
- Who in particularly is your target market?
- What specifically you offer?
- Where is the specified location that you offer this product or service?
For example, clothing (what) for premature babies (who) in the UK (where) is a niche.
A niche may be enough to differentiate your business; however, if your niche attracts many competitors you must look for ways to differentiate within your competitive niche.
If the research results into your niche are such that its value is worth £350,000 and your business required £500,000 revenue per year to make a profit; then this niche will not sustain your business and you will need to widen the scope of your niche. However,if in widen the scope to clothing for premature to 12month old babies in the UK, increased the market value to £5million, with competition from high street and online retailers, you will have to develop a differentiation strategy to create competitive advantage and compete with the retailers within this wider niche.
A focus on differentiation answers – Why would a customer buy from you rather than any other competing supplier? Your offer must stand out and be meaningful in the mind of your customers in the niche.
I love this quote: Michael Porter “operational effectiveness means you are running the same race faster, but strategy is choosing to run a different race because it is the one you have set yourself up to win.”
Operational effectiveness is doing things better using tools like re-engineering and change management. Running a faster race is exhausting and cannot be sustained indefinitely, eventually your competitors will catch-up. The strategy Porter is talking about is differentiation, doing thing different, finding a point of difference that is unique in your industry or niche.
Richard Rumelt writes in his book, Good Strategy Bad Strategy, that one of the pillars of good strategy is making sure your competitive advantage is difficult for competitors to copy. When you generate greater sales and/or retain more customers and are able to sustain profits that exceed the average in your industry, you possess a competitive advantage over your competitors. Creating your own niche and differentiation is a competitive advantage.
The more difficult your point of difference to replicate, the stronger your competitive advantage, and your business will be more attractive to investors, stakeholders and customers.
The process of defining your niche and creating a valuable and meaningful difference in the minds of your customers helps:
- Customers to identify, like and trust the brand and all it stands for.
- A unique tribe of customers and followers to like what you do and offer.
- Managers develop an in-depth understanding of the business strength, weaknesses, opportunities and threat.
- To create operational efficiencies.
- The business reputation increase along with brand awareness.
- The employees and managers become the experts at what they do best.
- The business set the standard competitors must follow.
- Sustain profits that exceed the average in your industry.
- The business create its own niche and unique difference.
- The competitive advantage to accelerate.
- The business becomes more investable.
What niche are you in? Can you customers define your unique difference? If not, this is a business strategy that creates real competitive advantage. Next week I will talk about strategies to gain competitive advantage.
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