Thursday, October 7, 2010

Revisiting Basics: Differentiation

By Dr. Glenn Rowe

You have a great idea! You’ve found a supportive supplier and you think there are customers who will buy your product/service. You’ve assessed there will be no substitutes for your product/service in the foreseeable future, that you can protect your product/service development and delivery systems and there will be no price wars in the next few years. So, what strategy should you pursue?

An appropriate strategy is differentiation – this means that you have a product/service that will be very different in many ways and you can charge a premium price that customers will pay. Supporting a differentiation strategy will increase expenses but that increase will be more than offset by your premium price.

There are many sources of differentiation and they are limited only by the creativity of those working with you. The first is product features which are easily copied. A second group consists of product mix, linkages with other firms, product customization, product complexity, and consumer marketing. These are less easily copied but can be copied over time. The third group, and hardest to imitate, are location, reputation, distribution channels, linkages among functions within your firm, timing of launch and service and support. Most of this last group involves relationships between people and takes time to develop.

The next question is: do you have the resources to support a differentiation strategy? Frankly, do you have the creative and innovative people to drive a strategy that develops a perception in the minds of customers that your product/service is more valuable? If your resources are mostly about “squeezing blood from a stone” you may have a mismatch between your resources and strategy.

A thorough analysis of your firm’s value chain can help assess this. You need to consider primary and secondary activities. The primary activities start with controlling and appropriately inventorying raw materials. Next, are the operational elements (e.g., effectiveness of production control systems to improve quality and reduce costs and efficiency of layout and work-flow design) required to add value to the raw materials going into the product/service. Then, effective outbound logistics are needed to ensure timely/effective delivery of your service/product. Further, you need effective marketing and sales to develop brand loyalty among targeted customers. Finally, you need to effectively service customers that will be more of a revenue benefit than a cost to you. All these activities need support from secondary activities such as an effective procurement system, a supportive Human Resource Management system, efficient and appropriate technology and a senior management team that can effectively integrate activities across the value chain.

The next step is to examine the structure, control systems and reward systems needed to support differentiation. Structurally, consider cross-functional linkages, a willingness to explore new structures to exploit new opportunities, and allowing isolated pockets of intense creative efforts. Controls should allow flexibility in controlling activities, tolerance for creative people and an ability to learn from innovative failures. Compensation needs to reward risk taking - not punish failure plus it needs to reward creative flair and allow subjective performance measurement.

leadership and preferences should always be top of mind. Are you a strategic, visionary or managerial leader? What type of culture do you want to develop? One that supports a differentiation strategy is assumed! Are you the leader to do this? Do you have what it takes to support creative people as well as account for the cash flow in and out of your firm? What are the preferences of your major stakeholders/investors? Are they supportive of the development of a differentiation strategy?

These are a few questions to get you going. In another instalment we will examine what it takes to pursue a cost leadership strategy.

*Dr. Glenn Rowe is the Director of the Executive MBA Program at the Richard Ivey School of Business, Canada. He is an Associate Professor of Strategic Management and holds the Paul MacPherson Chair in Strategic Leadership.

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