A company’s worst nightmare is blending into the background of their market. If you want to stand out, your differentiation strategy is critical.
The challenge is that your differentiation approach never happens in a vacuum. The market, your competitors, and even your own product will always be evolving around you, creating new pressures (and opportunities) in the process. This article will look at the reasons why you need to be regularly reviewing your strategy, along with guidance on how (and how often) to do so, through regular strategy reviews.
What is differentiation strategy?
Virtually every organization, whether intentionally or not, attempts to differentiate. As a result, there are many concepts of what a differentiation strategy is.
Harvard Business Review defines it as “offering customers something they value that competitors don’t have.” While this is accurate, at Gaussian we define it more concretely:
A differentiation strategy is a communicable plan to maximize and sustain the competitive edge of your product, services, and company.
Why differentiation is difficult
Differentiation is difficult because it requires developing a communicable and sustainable plan. Unfortunately, this plan does not appear out of thin air. It’s no secret that some business executives believe strategy planning takes too long or becomes redundant after one year. But this is not because of the strategy itself, but the process around its creation.
A typical pitfall of defining a differentiation strategy is that many companies do annual strategy planning, and then promptly archive them. The plans, it seems, are no longer applicable merely two weeks after writing them.
Some enterprising companies have changed how their strategic planning operates by continuously evaluating their plan, instead of bulking all critical decisions into one month out of the year. Organizations that prioritize this ongoing planning, “...make more than twice as many important strategic decisions each year as companies that follow the traditional planning model.”
4 drivers of pressure on your differentiation strategy
There are four primary influencers that can cause pressure to your strategy, driving a need to reevaluate it on a regular basis.
1. Your customer and the market knowledge constantly improve
Your differentiation strategy is defined by your understanding of customer needs, but your understanding of those needs naturally evolves with time. As we sometimes say to our clients, “a small business is just a market research company," because of the need and speed of learning.
The fact is, you’re constantly learning about your customers, even though you may not realize it. The more customer interactions you gain, the more products or services you get into the market, the more you’ll learn.
And if you want to formalize your learning process further? Here are four avenues you can leverage:
- Customer feedback and sales conversations
- Customer support emails
- Focus groups and surveys
- Market research
Some of these are easier to implement than others, of course. Studying your existing conversations and support emails is much easier to accomplish than focus groups, surveys, and market research. However, the more time you put into understanding your customer, the more successful your strategy will be.
2. Your product and services evolve
The goal of a company’s differentiation strategy is ultimately to ensure that your offering is more attractive to customers than your competitors. As you improve your product, it will gather more and more information about whether your differentiation strategy is successful. If your organization is gaining more revenue, it’s likely your strategic decisions based on your differentiation strategy are working.
The strength of your service may also turn into a differentiator. In fact, how your service's differentiation factors into your overall strategy may evolve. For example, your marketing may increasingly strike a balance between differentiated features and "table-stakes" features that are not as top-of-mind for your customers. From your company’s perspective, they could be critical for securing sales and boosting satisfaction.
Finally, your customers’ happiness around your offering is key to any new competitors that appear in the market. If satisfaction is high, that presents unique opportunities; and if satisfaction is low, you are at higher risk of competitive action. Either way, your strategy needs to adapt to these findings.
3. Competitors emerge and adapt
Competitors are not static; they too are learning and evolving their services. Not to mention the constant stream of new entrants to markets. Your strategy for differentiation must adapt to the latest market moves by your competitors and other adjacent companies.
Take the radio industry in the 1950s as a real-world example. The radio manufacturer Zenith dominated the market with high-quality radios. In 1955, Sony’s transistor radios came into play, and began to disrupt the radio market. They were inexpensive, small, and appealed to a younger audience, even if the sound quality was lacking.
Their popularity skyrocketed — they adapted to a new market and stood out from their competitors. Zenith was soon left at a loss. If Zenith had learned more quickly from Sony and adapted their strategy, they may not have lost their market dominance.
Of course, these examples abound at larger companies, who tend to adapt slowly and struggle to react to competitive pressures. Smaller businesses are able to react more nimbly, which is all the more reason to regularly review your strategy.
Competitors can do the heavy research lifting
You can treat competitors as free researchers. Their marketing and product features describe their own differentiation strategy, and are their own hypotheses for what customers need.
Think of one of the classic examples of disruption in the modern era: Blockbuster and how it failed to learn from Netflix. Netflix had a hypothesis that it’s consumer base wanted DVDs shipped right to their doors. Blockbuster had ample opportunities to pivot their differentiation strategy and made a strategic decision to keep up with evolving consumer needs, but they failed to do so. (They even infamously passed up on the chance to buy Netflix for $50 million.)
4. Your customers and markets change
Markets, and customers themselves, evolve. Sometimes they grow slowly; for example, the increasing usage of workplace IM platforms such as Slack or Microsoft Teams. Diversity, Equity, and Inclusion (DEI) spending has also increased by various companies in recent years. In 2020, General Motors pledged $10 million to support organizations promoting racial justice and inclusion. Consumers are looking for companies that are prioritizing social inclusion more and more.
On the other hand, some business markets change rapidly. COVID-19 is a prime example of how rapid, unexpected market change can create opportunities. When companies like Zoom were ready to serve these new needs with a great, user friendly product, they thrived. And similarly, while industries like meetings, events, and trade shows were devastated by the pandemic, those who quickly pivoted their strategy toward digital events and meetings thrived by seizing the market opportunity.
To adapt to these four areas of pressure, your differentiation strategy must be reviewed regularly. We recommend that you do so at least each quarter. This way, you can proactively identify headwinds (and possibly tailwinds) before they devastate your well-laid plans.
3 steps to establish and review a differentiation strategy
There are three steps to using the strategy feedback loop effectively in your business.
1. Strategize annually in a consistent manner
The first step to making a profitable strategic decision is to plan your differentiation strategy annually. Any strategy planning process is comprised of the following 6 stages (implicitly or explicitly). At the least, spend a single working session on each of them (this can yield a strategic plan within a couple of weeks if your teams are sufficiently prepared):
- Define outcomes: Set the concrete, guiding outcomes that your organization needs to hit (eg $50M in annual runrate revenue within 3-5 years)
- Research & diagnose: Pull in internal and external data points, trends, best practices, advice, research, competitive benchmarking and more, to build a picture of where opportunities may lie
- Ideate opportunities: Use the research and a wide range of team members to brainstorm and ideate potential big opportunities that can achieve the bold outcomes defined earlier
- Prioritize opportunities: In a separate session, score and prioritize all opportunities, for instance according to impact and feasibility - you can only execute against a small number of them
- Vet & approve: Adapt and build buy-in for the prioritized multi-year strategic opportunities, and turn it into a communicable "Strategic Statement"
- Execute: See Step 2 below
For more information about these stages, see our series of 2 minute videos on the 6 Steps to Strategy Planning.
2. Break the annual plan into quarterly objectives and initiatives
At this point, you have a long-term strategy, but it's still theoretical and idealized. No one is executing it, and no one is being held accountable to it.
The critical task at this point is to break the the long-term objectives and opportunities into much more near-term initiatives. This connects your long-term planning to your medium-term planning, ensuring that your big-picture strategy is connected to the immediate term, is real, and is being incrementally achieved.
What does this mean tactically? Here is a simple way to think of it:
- Start with the long-term opportunities in your strategy
- Quantitatively define what "meaningful success" would look like in each opportunity over the next 1 year
- Quantitatively define what "meaningful success" would look like in each opportunity over the next 1 quarter
Here's a real example from one of our clients:
- Start with the long-term opportunities in your strategy: Reach $10M runrate revenue in 3-5 years via expanded distribution capability and network-driven sales
- "Meaningful success" over next 1 year: Procure purchase orders for 50,000 tons of product + ink contract with 1 European distributor
- "Meaningful success" over next 1 quarter: Vet and shortlist 3 European distributors + sign 2 LOIs for at least 20,000 tons of product
It's all about cascading, from long-term (multi-year), to medium-term (1 year), to short-term (1 quarter), seamlessly. We call this decomposing a strategy.
Initiatives that span a quarter can then be effectively delegated to appropriate teams to lead to the required quarterly objectives.
3. Assess progress frequently against the quarter’s objectives and initiatives
Objectives for a single quarter are not going to meet themselves. You can pull up at the end of a quarter and realize that none of the goals or tactics were achieved. This would be a huge miss.
To ensure initiatives are on track, you can take a page from the Agile playbook and review progress every 1-2 weeks. We call this the Strategy Drumbeat. Keeping the rhythm is critical.
You must be honest and quantitative, even in the face of soft or "unmeasurable" objectives. Using a stoplight status can help. For each quarterly objective, ask yourself every 1-2 weeks if the objective is:
- Green: Expected progress made
- Yellow: Some setbacks to expectations
- Red: On fire, course correction needed
Similarly, you can ask the same semi-quantitative status for each of the initiatives that are being executed, every 1-2 weeks.
Your goal is for all objectives and all initiatives to be green, every week, because every week you should be making meaningful progress. Even initiatives that may seem like they show no measurable progress until weeks or months down the road can still be estimated in soft terms. For instance, "launch first release of product" may seem like a binary objective, but it can be broken down into a sequence of features, user stories, engineering hours, or customer checkpoints.
No meaningful progress on an objective or initiative? Then it's time to problem-solve and ask what it would take to make the objective or initiative green again. If you don't strive for incremental progress, then you sadly you're not executing.
A regularly reviewed differentiation strategy means sustainable growth
To outpace your competitors, deliver a product or service that meets the needs of your customers, and drive profitability, your business must revisit its differentiation strategy often.
You shouldn’t do this review haphazardly. Instead, you must plan your strategy annually, decompose it into shorter-term quarterly objectives, and frequently assess against these. Use the strategy feedback loop to plan and evaluate your strategy on a regular basis.
Need help developing your differentiation strategy or conducting its review? Learn how our team at Gaussian can help. We’re always thrilled to talk to leaders about their bold strategy visions.
Photo by Clay Banks.