For an organization, one of the hardest problems to solve is standing out from your competitors. But how does management strategically ensure that an offering is unique from competitors?
The key is to develop a differentiation strategy. The most profitable organizations succeed at differentiating themselves — since an offering that blends in with the rest of the market will struggle to be profitable.
But what does it actually mean to differentiate in a strategic way? This article focuses on answering the question “what is differentiation strategy”, and then discusses why organizations that focus on differentiation are able to improve their bottom line.
What is a Differentiation Strategy?
Michael Porter, renowned Harvard Business School professor, defined differentiation strategy in his text Competitive Advantage: Creating and Sustaining Superior Performance as follows: “In a differentiation strategy, a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions itself to meet those needs.”
At Gaussian, we define it as such:
A differentiation strategy is a communicable plan to maximize and sustain the utility of your product, centered around your customer needs, now and into the future.
A key to a successful differentiation strategy is to align your product or service with customer needs. A popular example lies with Amazon. For many years, Amazon has offered two-day shipping to appeal to customers who want their products fast. This customer-oriented feature disrupted consumer expectations and is one of the elements that has resulted in a market cap of nearly $2 trillion.
A critical part of Amazon’s success is due to their focus on customer satisfaction and, in particular, offering their customers choice. As Jeff Bezos himself explained, “Our name has got to be Amazon. We are going to be very big - like the Amazon river.” Their ability to achieve such satisfaction is derived from their differentiation strategy, which focuses on continuously meeting customer needs more effectively than other competing vendors by having more choices.
Broad versus Focused Differentiation Strategies
There are two fundamental approaches to developing a differentiation strategy: broad and focused.
A broad differentiation strategy involves identifying industry-wide competitive advantages that set an offering apart from competitors. For this type of strategy to succeed, the customer market must be vast, unsaturated, and have numerous unresolved pain points. A product that is utilizing a broad differentiation strategy must be widely valued by customers, and due to its uniqueness in a large market, it can be priced above the competition.
An example of a successful broad differentiation strategy is the company Morton Salt. Salt is offered everywhere, but Morton separated itself from the large market in the 1920s by treating their salt with iodine. Such a simple change led to customer’s making an easy switch to their product to fill their need for an essential nutrient.
A focused differentiation strategy is developed when an organization wants to focus on one specific customer market. A focused strategy takes a segment of the previously described broad strategy audience and narrows the focus down to those with unique needs. The market should be niche, but there must still be customer needs to address — because without customer needs, a new offering is not necessary.
Looking to refine your current strategy and dive deeper into what a differentiation strategy is? Be sure to review Part One of our product differentiation strategy blog series.
HubSpot offers an excellent example of a focused differentiation strategy. HubSpot entered the market in 2006, at a time when the CRM market was dominated by players like Salesforce, SAP, and Oracle. These market leaders largely focused on the upper end of the market, leaving platforms like this often unattainable for small to medium sized businesses.
HubSpot entered the market with a focused differentiation strategy by prioritizing making its product accessible to small businesses and startups - both in terms of ease of use and adoption as well as in pricing. This differentiation holds true today, as HubSpot continues to offer a range of products and a freemium model that’s designed to capture startups and growing small businesses.
Organizations that find the most market success tend to have clearly defined differentiation strategies. Depending on an organization’s offering and the market, it may make sense to pursue either a broad differentiation strategy, solving a problem for broad swaths of the market, or a focused differentiation strategy, focusing on a niche within the market that has specific unsolved pain points.
In our next blog post, we’ll discuss the specific benefits that a strong differentiation strategy has on profitability.
Learn how a differentiation strategy can boost an organization's profitability.
Need help better understanding how an organization can differentiate their offering, in either a broad or focused manner? Contact us and learn how our strategy team can help.
Photo by Anne Nygård.