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Competitive Differentiation

Competitive
differentiation
is a form of innovation that is all about getting a bigger buy from your
customers. It works by separating yourself from your competition in ways that
cause customers to choose you. It is a little more nuanced than it
sounds. Here is an example to illustrate.

If you are a hardware store competing with two other stores in your
locale, your customers are spreading their business across three
stores. In this situation competitive differentiation means
distinguishing yourself from the other two stores in ways that cause
people to choose you over the others.

Some of those customers you are courting are already patronizing your
store, but they go to the other two stores, too. Your job is to figure
out why and bring everyone to your store whenever possible.

competitive differentiationIt’s helpful to think of the customer base using three
circles as in the adjacent figure.

On the far left inside Your Operation,
you see the D-zone, so named because this symbolizes your dedicated customers. These people
have already decided that you are the provider for them. Your primary
activity in this space is maintaining this group, ensuring they stay
dedicated. This is your home base. There is no competition here.
However, you always want to be alert if there is any indication they
are migrating to one of the other six zones shown to the right.

On the far right are similar D-zones. These are your competitors’ home
bases. D-zone A represents all the customers who have decided to do
business with Competitor A, and D-zone B is the same for Competitor B.
D-zone AB indicates those customers torn between your competitors, but
not considering you – in other words, they are dedicated to A or B.
Since you are not in the mix, this is not an area of competition for
you. You can only compete where
customers are torn between you and another.

In the middle are the C-zones, named for competition. Here is where the
battle rages. C-zone A represents those customers trying to decide
between you and Competitor A. C-zone B represents those doing the same
with Competitor B. C-zone AB are those wrestling between you and A or B.

The key to competition is not only what distinguishes you from your
competitors. It is what differentiates you in the areas your customers
care about.  For example, you may have lower prices and feel this
is your unique differentiator. But customers may be looking for
convenience and willing to pay more for it. If stores A and B get their
customers in and out of the store in less than half the time as you,
you are misplacing your resources to focus on price. Hire a few extra
people to work the floor, teach your cashiers to operate with speed
even if it means you have to raise your prices to pay for the extra
staff. Conduct a marketing campaign that highlights how you get your
customers in and out of the store more rapidly than your competitors.

It is critical that you understand what your competitors are providing
that your customers value. That is the locus of battle. Thus the name, competitive differentiation.

cdTo compete successfully you must work hard to understand
what motivates potential customers to choose your competitors. Then you
are in a position to turn their behavior. If you only focus on what you
offer, you miss the actual competition zone.

Another look at our chart here and you will see the three intersection
zones that overlap with Your Operation form “the front” of the battle.
This is where you compete.

You may have customers who move from your D-zone toward your
competitors. To do so they will have to cross through the front where
they make their decision about who to patronize.

If you are suffering an exodus you must fortify the front facing your
own home base. You can do this by reinforcing what your dedicated
customers value.

A positive inflection point – a dramatic shift you cause in the market
– is an excellent tool to capture the attention of your competitors’
existing customers and stimulate them to make a decision about who they
are going to buy from. In this way a positive inflection moves your
competitors’ customers from the D-zone to the C-zone where you can woo
them.

When Verizon launched FIOS, their bundle of home communications
services, they created an inflection point by bringing fiber optics
straight to the homes of their customers. This grabbed the attention of
many who went on to re-evaluate their service providers and decided to
leave Comcast and other competitors to experience fiber optics at home.
Then Verizon was in a position to get a bigger buy by bundling services.

Verizon launched a competitive differentiation initiative, moving Comcast customers from Comcast’s D-zone out into the competitive space. There Verizon was able to pick them off with the attraction of higher speed. How might you move your competitor’s customers into the competition zone? And once you do, what will you be able to offer them that only you have?

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Getting Innovation book linkMy next book, Getting
Innovation Right
, comes out in early 2013. 

To read an overview, see my latest Fast Company post: 7 Key Activities for
Getting Innovation Right.