Sustainable Differentiation

Over the last few months I’ve been giving some thought to what we mean when we talk about differentiation at work and it’s a confusing answer.  Sometimes we mean how we differentiate ourselves on a particular deal, sometime what we currently do better than our competitors and very occasionally we mean what’s fundamentally different about our approach in the longer term.  All of these are valid meanings, but bundling them all together into a single word doesn’t work, n conversation it’s hard to tease out what we mean. 

Perhaps worse is when differentiation is neglected, when we are so‘head down’ working on what’s necessary today we don’t find time to think deeply about what will make us different tomorrow.  Theodore Levitt, a professor at Harvard Business School, suggested that:

Differentiation is one of the most important strategic and tactical activities in which companies must constantly engage

I agree, but what’s interesting about the quote is that differentiation is both important tactically and strategically.

I like to think of differentiation as layered in a similar way to Maslow’s Hierarchy Of Needs.  It can even be thought of as a pyramid.  At the base of the pyramid are the market imperatives, the things that all competitors need to do in order to compete in the market. Next up is our ability to execute on those imperatives, at  any point in time competitors will be leap-frogging each other.  The final layer comprises sustained differentiation, the things that are unique about our approach, our culture, our focus, our values.  Like Maslow’s hierarchy the lower tiers of the pyramid are incredibly important until they are present, then they are instantly forgettable.  It’s only the sustained innovation that makes a difference in the long term.

Meeting the market imperatives and ability to execute on them wins business today, but my companies business was long term, customers formed partnerships that lasted a decade or more, so strong sustainable differentiation, communicated well can be extremely important; so important that it can make up for gaps in ability to execute, provided customers are confident they will be filled.  It’s the sustainable differentiators that help a customer choose the ‘right’ partner, the lower tiers help a customer create a shortlist of possible partners.

On a specific customer deal all of these differentiators contribute to create a unique selling proposition (USP) but other critical factors also come into play:

1. Customer unique imperatives and biases concerning execution, for example some customer might have unique security needs and be deeply focused on zero user disruption during deployment
2. Alignment with customer biases for specific technologies or third party vendors, for example wanting a customer might want a Microsoft centric solution
3. Pre-existing relationships, for example one of our senior leaders might be an ex employee and retain a strong bond of trust
4. Switching costs, the disruption cost associated with retraining users in a new technology, or ousting an incumbent
5. Discounts on price, competitors might discount the price in order to gain a foothold in a new market
6. The personalities and capabilities of customer facing sales and delivery teams, the customer might just ‘like’ the people in one team more than another

These customer specific differentiators are critical to winning business, but they rarely deliver true market differentiation.  For that we need to return to the differentiation hierarchy, using Amazon web services as an example:

1. Ability to meet all the market imperatives,  Amazon has a huge range of services with a good balance of breadth of capability and depth of proven features.  Although in specific narrow areas competitors like Microsoft Azure might have more.  In most deals Amazon will tick all the boxes at this tier.
2. Ability to execute on the market imperatives, Amazon’s ability to execute is legendry, it has huge scale, broad geographical reach, high availability and a growing network of partners.  However there are some areas where for large enterprises it might fall short, to combat these capability gaps it’s going to rely on it’s sustainable differentiation and/or it’s partners
3. Sustainable differentiation, what makes Amazon different though, well scale for sure, but at some point (maybe already) it’s competitors have large enough scale to deliver almost all of the associated economises.  Once you have a million plus servers, having more doesn’t help that much.  Fortunately for Amazon they know what makes them different.

Amazon’s sustainable differentiation:

1. Everything they do starts with the customer, competitors claim this is what they do, but most are actually competitor driven companies, by contrast 90% of Amazon’s roadmap is driven directly by customer feedback, 10% is driven by inventing solutions to customer problems.  This gives customers confidence that Amazon listens, that in a long term partnership Amazon will deliver
2. Visionary pioneering culture, Amazon develops their own services, they rarely acquire, this positions them well for a fast moving market.  They have an overarching vision that ensuring that everything fits together.  looking at Amazon’s track a record a customer can have confidence in the direction Amazon is taking and their ability to execute on it
3. Long term oriented, Amazon proudly asserts that they will never ring customers at the end of a year or quarter to try and make a sale to make their numbers.  There approach is to plant seeds that will grow into strong relationships with customers.  These seeds include proactively advising customers on how they can reduce their costs, fundamentally they only want to make money out of adding value. They provide subscription services so that they have to “win a customers business every day by adding value”

I chose Amazon as an example for this post because of their impressive sustainable differentiation.  It’s crystal clear, they live and breath it and their track record demonstrates that it’s a business reality not a marketing message.