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This chapter is from the book

Gaining the Competitive Advantage: Differentiation

Differentiation answers the question: “Why should a member of the target segment buy my product or service rather than my competitor’s?” A related question is: “What are the unique differentiating characteristics of my product or service as perceived by members of the target segment(s)?” The italicized words in these questions are crucial for effective positioning. First, the word perceived must be analyzed. It is obvious people make decisions based only on what they perceive. Many entrepreneurial firms are happy when they have developed products or services that are actually better than the competition on characteristics that they know should be important to people in their target market(s). What they forget is that the job is not done until the targeted people actually perceive the differences between their product and the competitions. In fact, in the Internet space, many companies try to gain the perception that they’re better long before they can deliver on that in reality.

One of the hindrances to effective positioning is that most humans cannot perceive more than two or three differentiating attributes at a time. It is important that the differentiation be easy to remember. If there are too many differentiating attributes, the potential consumer can get confused. The marketer’s job is to isolate the most important differentiating attributes of her offering and use those in all the elements of the marketing mix. In many cases, it is cost effective to do concept testing or other research with potential consumers to isolate the best combination of attributes (see “Testing Purchase Intention: The Concept Test” in Chapter 2, “Generating, Screening, and Developing Ideas”). In other cases, the entrepreneur can instinctively isolate a good combination of attributes.

Entrepreneurs who have been successful may overstate how easy it was to get a good combination of attributes for differentiation. Companies such as Starbucks (just great-tasting, excellent-quality coffee) or Apple (fun and easy to use) were successful at least partly because of very effective positioning. What has not been documented is how many entrepreneurial ventures failed (or were not as successful as they could have been) because their differentiation and associated target segments weren’t very effective. The venture capitalists’ estimate (cited in the Introduction)—that as many as 60% of failures can be prevented by better prelaunch marketing analysis—underscores the importance of getting your positioning right and testing with real consumers to confirm that it is right.

A big mistake many ventures make is to differentiate based on features of their product offering compared with their competitors. It’s amazing how many entrepreneurs we have encountered who have great ideas based on technical features that are somehow better than their competitors’. The fundamental paradigm that “customers don’t buy features; they buy benefits” has been lost on many entrepreneurs. Even more precisely, customers buy based on perceived benefits. Not only does the entrepreneur need to develop the best set of benefits versus the competition; he must also somehow get the customers to perceive these benefits.

In his article, Look Before You Leap, Robert McMath also says that communicating features instead of perceived benefits is “one of the most common mistakes marketers make.”5 He describes a training film in which British comedian John Clease illustrates how a surgeon might explain a new surgical procedure to a patient lying in a hospital bed:

  • “Have I got an operation for you...Only three incisions and an Anderson Slash, a Ridgeway stubble-side fillip, and a standard dormer slip! Only five minutes with a scalpel; only thirty stitches! We can take out up to five pounds of your insides, have you back in your hospital bed in 75 minutes flat, and we can do ten of them in a day.”6

The surgeon is concerned only with technical features that he as producer (entrepreneur) is excited about. The customer has different concerns. All the customer probably wants to know is whether he’ll get better, perhaps what his risks of complication are, and whether he’ll be in pain.

Distinctive Competence and Sustainable Competitive Advantage

Differentiation, by itself, is not to ensure success in the marketplace. Successful companies are able to leverage their differentiating attributes into a sustainable competitive advantage, the Holy Grail that most ventures continually pursue. If a way can be found to continually be ahead of competition, then the venture will probably return higher-than-normal returns to its owners. Being ahead of competition means that the venture can easily sell more, and/or charge higher prices, and/or have lower costs than “normal” firms. Let’s look at competitive advantage from an entrepreneurial marketer’s point of view. As you will see, this point of view is the customer’s point of view. Your perceived competitive advantage, related to your competitive price, is why the customer or potential customer will more likely buy your product or service. If you can create competitive advantage that is sustainable from competitive encroachment, you are creating sustainable value.

Distinctive competence is how some people refer to the advantage that is the source of the sustainable competitive advantage. If the advantage is sustainable, then your venture has something that is difficult for your competition to emulate and must be somewhat distinctive to your venture. What are sources of distinctive competence for entrepreneurs that might be sources of sustainable competitive advantage? Creative entrepreneurs seem to be finding new distinctive ways to get customers to prefer them to the competition. Here are some of them:

  • Many companies use technology to obtain competitive advantage. Patents and trade secrets are weapons that might keep competition from imitation. For software companies, source code for their products may be a key competitive advantage. Priceline.com has a patent on their method for having consumers try to name their own price for goods and services. This is a source of sustainable competitive advantage.
  • Other companies may rely on excellent design, perceived high quality, or continual innovation as distinctive competencies. In its prime, Dell Computers, for example, was able to offer the unique value proposition that it would custom build a computer, exactly as and when a customer ordered it, and deliver it at a competitive price. Dell was able to execute on this because its investment in supply chain and order management systems created a “just in time” system, eliminating the cost of overhead, inventory, and mistakes in calculating demand. However, as other competitors, such as Lenovo and Hewlett Packard, have found alternative low-cost manufacturing and distribution systems, Dell’s competitive advantage has been eroded.
  • Other businesses use excellent customer service by loyal employees who have adopted corporate service values. Southwest Airlines is a great example of a venture that differentiates itself from competitors with both excellent customer service and technology for scheduling and turning flights around. Many customers fly Southwest, not only because it is economical, but also because it is fun. Other airlines have tried to imitate Southwest and have been unsuccessful.
  • Reputations and other differences in customer perception of products, services, and companies can be extremely valuable sources of sustainable advantage. If consumers perceive you as being a preferable source, they will more likely choose your products or service. Industry-leading quality of service has always been a Lexus hallmark. Think about how Lexus focuses on providing a great customer experience. They collect lots of information from each customer and use it the next time the same customer interacts with the company to make her experience even better, from service scheduling, to loaner cars, to doing a good job explaining the work that was done on the vehicle, to completing a quality vehicle inspection process. This is a major reason why Lexus became the top luxury import in 1991 and the number-one luxury car overall in 2000, a title it kept until 2010 when the other two big luxury brands began significant programs to compete with Lexus on service, quality, and innovation. Once the European luxury brands (Mercedes, BMW, and Audi) had achieved parity with Lexus on service, quality, and innovation, they were able to differentiate on brand heritage, which was difficult for Lexus to compete with. Lexus did not continue to differentiate itself on service or quality by upgrading its perception versus the competition. The lesson here is that positioning is not static but needs to be constantly strengthened compared with the competition.
  • Diapers.com developed a reputation for amazing customer service by making it their highest priority from the venture’s beginning in 2005. Everything they did was targeted toward strengthening their desired positioning—prices similar to Walmart; fast, reliable, free shipping; the broadest selection anywhere; and excellent customer service. In 70% of the United States, if a mom ordered diapers or any other baby stuff from diapers.com by 6:30 p.m., she would receive the shipment the next day. Diapers.com was an innovator in using Kiva robots to semiautomate their warehouse/fulfillment function in order to be able to get such fast fulfillment. Diapers.com and its successor websites were bought by Amazon in 2010 for over $500 million. After Amazon saw how successful the Kiva robots were, Amazon also bought Kiva. Even as a division of Amazon, diapers.com was still getting over 30% of new customers via referrals from existing customers.

    The “secret sauce” to diapers.com and its successor websites—yoyo.com (toys), soap.com (health and beauty aids), beautybar.com (upscale cosmetics), and casa.com (housewares)—was the way they handled customer problems. From the beginning of the company, the “complaint department” was in the corporate offices, right next to the CEO’s office. All of the firm’s managers had to spend time answering complaints from customers. All of the employees in the department were incented in only one way—to delight the customer at the end of the complaint interaction. They had no constraints—and could do anything they wanted to make sure that the customer’s complaint was not only solved, but that the customer was delighted after the interaction.

    Marc Lore, the cofounder and CEO of the company, really understood the power of reputation with young mothers. Every time a customer’s complaint was turned to delight, they were very likely to want to share their delight with their friends.

All of these are ways that entrepreneurs search for sustainable competitive advantage. They relate to how customers choose one product or service versus another. Key segmentation and differentiation decisions are intertwined with why customers will choose you versus your competition. These decisions, which feed your unique value proposition, are best made to leverage the distinctive competence of the venture.

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