Ever since the idea of strategy came to the business world in the early 1960s, the goal of differentiation has been paramount. Customers choose the company that gives them value that other companies can’t match. A company that can show it is different from other companies, in a way that is relevant to customers, gains a major competitive advantage.
As business strategists, we see endless amounts of writing about how to achieve differentiation. And we see many executives trying to take this advice to heart. But we are also regularly reminded of the lack of true differentiation in most mainstream global companies — and of the opportunities they are thus squandering.
The problem starts with the way many business people think about differentiation. To them, the unit of differentiation is an individual product, service or brand. That’s what customers see, after all, relative to what the competition can provide.
But differentiation needs to be sustainable; it shouldn’t live or die with individual offerings. The heart of differentiation therefore is your company’s ability to develop and promote distinctive products, services, and branded experiences on a consistent basis. It’s not the output that sets you apart, but the way that everything you do supports the product and gives it context. With truly differentiated companies, much of the distinction goes beyond the product itself. With Apple, you don’t just buy a computer or a phone, but a seamless array of related online services and a genius bar to help you solve problems. With IKEA, you don’t just buy a couch or a cabinet, but a means of decision-making, assembly, and delivery.
Your differentiation challenge is to set apart your company as a whole, instead of staking your future on one or two isolated products. This requires you to build distinctive capabilities – to learn to do a few things really well, that few, if any, other companies can do.
This is a change from the differentiation strategies of the past. Back in the 1980s, a company could set itself apart through scale, being the largest company in a category provided leverage over costs, back office processes, distribution, and marketing effectiveness. But starting in the early 2000s, the advantages of scale were mostly eliminated, in large part because of globalization, deregulation, and the rise of digital technology. It became easier and easier for small enterprises to gain customer reach and awareness (along with working capital). Large companies found themselves competing against a much larger group of rivals, and a more global group, than ever before.
Differentiating by product or service served as an alternative strategy, but with increased competition, it is also no longer enough for success. A company with a distinctive product is a “one-hit wonder”; when that hit loses popularity, or if something else happens to it, the whole enterprise is vulnerable.
Consider, for example, the way many credit cards are marketed. Since they all essentially offer the same commodity service — unsecured loans — they have to find other forms of differentiation. This usually means alliance with another business: creating airline cards with frequent flier miles, cards with extended warranties subsidized by insurance companies, or retail cards offering exclusive access or discounts. Thus American Express had an extremely valuable “one-hit wonder”– an exclusive arrangement for years with the CostCo retail chain in the U.S., which permitted no other card in its popular stores. But in 2015, CostCo shifted its affiliation to Citigroup’s Visa. Discover suffered a similar setback in 2004, when Walmart shifted its credit card partnership to MasterCard.
Moreover, when you differentiate by product, you risk incoherence — because different products may require different capabilities, and that can pull your company in too many directions at once. For example, Iams pet food was one of the first premium brands; it sold to health-conscious pet owners, who purchased it only at specialized pet stores. When Procter & Gamble purchased it in 1999 for $2.3 billion, it was regarded by many as a good acquisition — adding another premium, differentiated offering to Crest, Tide, Ivory Soap, and the other highly valued brands that P&G purveyed. But it didn’t quite work out that way. Over the next decade, new competition emerged in the form of gourmet pet foods. P&G is unparalleled in developing and positioning personal care and laundry products, but it didn’t have the capabilities to maintain Iams’ distinctiveness in the suddenly more competitive pet food arena. In 2014, P&G sold Iams and its related brands (Eukanuba and Natura) to Mars, which had other distinctive pet food brands (like Whiskas) and thus had the requisite capabilities in place.
The most effective companies don’t rely on distinctive products, services or brand for differentiation; instead, they focus on creating an enterprise so distinctive that it can create many products, services and brands, each more compelling than the next.
In our book Strategy That Works we articulate what those capabilities can look like, how to blueprint and build them, and how to bring them to scale. Our recommendations for accomplishing this start with the top team’s commitment, and expands to include people throughout the enterprise. Our recommendations include:
- Be skeptical of benchmarking. Don’t be drawn into practices that are not right for your company, even if they’re common throughout your industry.
- Start from your goal and work backward, articulating the steps you’ll need to take to get from the capabilities you have to the capabilities you need.
- Continue to use focused interventions — the kinds of moves you already make to adjust systems and organizations — but align them all to realizing your strategy.
- Become a remarkable capability innovator, designing and developing your own practices that give you prowess no one else matches.
- When acquiring companies, look for “enhancement deals:” prospects that fill in the gaps in your own capabilities; and pay attention to post-merger integration.
- Design your capabilities with teams that transcend functional boundaries.
- Make tacit knowledge explicit by codifying the things you do in capabilities, but keep rethinking, improving, and reworking your codification.
Distinctive capabilities cannot be easily replicated by others. They are present in everything these companies do. They start paying off as soon as you begin developing them, but they deepen and become more powerful over time, as you apply them to products and services around the world. Other forms of value creation are short-lived. Differentiation through capabilities is not. It is the only way we know to generate consistent success, time after time, with the same clear strategic identity behind everything your enterprise does.
Paul Leinwand is Global Managing Director, Capabilities-Driven Strategy and Growth, with Strategy&, PwC’s strategy consulting business. He is a principal with PwC US. He is also the coauthor of several books, including Strategy That Works: How Winning Companies Close the Strategy-to-Execution Gap (HBR Press, 2016).
Cesare Mainardi is the former CEO of Booz & Company and Strategy&. He is the coauthor of several books, including Strategy That Works: How Winning Companies Close the Strategy-to-Execution Gap (HBR Press, 2016).