Living differentiation

The following post originally appeared on the Harvard Business Review Blog Network

I've just returned from a trip to Germany and Scandinavia, where I heard two different management teams debate what it meant to be "truly differentiated." Both teams were struggling with a familiar paradox: As consumers, we know almost instinctively when a product or service is really stands out from other available offerings and we seek it out accordingly. But it's much harder for a management team to design a differentiated product or service and deliver it to consumers consistently.

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As consumers, we're happy with most products or services if they're good enough — as long as it 'does what it says on the tin', as the English say. But for some products, differentiation matters a lot: We pass by the nearby retailer to go the shop we really like, and we ignore cheaper store brands because we prefer a more expensive product that we believe is better. And certain items — our phones, cars, shoes, handbags, favorite hotels, etc. — get us quite excited. We don't just buy those products, we advocate them to others. At the extremes — Harley Davidson and Marmite — we tattoo their logos across our bodies. We don't question this behavior; it's just something we understand.

So why, as businesspeople, do we have so much difficulty with differentiation? I sometimes get the feeling it's the most overused and least understood word in the management lexicon.

Ask executives whether their company's offerings are differentiated and about 80% will say yes. But ask customers of those companies the same question and only about 10% will agree.

Or ask a company's management team exactly what it is that makes their products or services different from competitors, as we often do. You'll often hear as many as a dozen different responses.

And yet, if a company isn't clearly differentiated from competitors, it essentially has no strategy. The assets and capabilities that form true differentiation are your company's crown jewels, determining whether you outperform competitors.

So what is differentiation?

We know what it isn't. It isn't 'just a brand' — good brands are necessary, but they are not enough. It isn't your collection of products and assets per se; they may describe well what you own and sell, but not what you do well for your customers. And it isn't your mission statement, vision, or strategy in and of themselves — those things amount to statements of what you intend to do.

Ultimately, differentiation is found in what you do for your customers each and every day. It is embodied in the routines that people throughout the company follow, especially front-line employees. Unfortunately, more than half of front-line employees say in surveys that they're unclear about their company's strategy and what makes it different from competitors.

The more we've studied it, the more we also think differentiation is a sort of social contract with your target customer. For IKEA, differentiation starts with an implicit deal — the company promises to deliver well designed furniture at 'breathtaking prices' (in its words), if you, the consumer, agree to share some of the assembly and distribution costs.

But differentiation is also hidden in the maniacal routines followed by IKEA staff to deliver. There's a team obsessed with increasing the number of cups that can be stacked on a pallet. There's a working group on particle board that found if you increase the density of board at the joints, you can decrease it everywhere else, lowering costs and increasing quality. No wonder the Billy Bookcase has dropped 76% in price since first introduced.

Olam International has become one of the world's leading agricultural products companies by managing commodities all the way from farm gate to processor. The company requires its managers to live in rural areas of developing countries so that the managers know what really goes on at the farms and can establish relationships with farmers. A would-be competitor couldn't just say, "We will go to the farm gate, too," unless it was willing to build in the same kinds of daily routines and activities as Olam.

So differentiation isn't what you own or what you say you're going to do, it is what you do, every day, through repeatable activities to serve your customers better than the competition.

It can be measured. Is your cost position better, product quality better, or loyalty better? It can be defined precisely. My colleague Chris Zook and I have catalogued 250 different assets or capabilities that can contribute to a company's differentiation. Typically a company needs to excel in four or five of these categories to be truly different from competitors. For example, Vanguard, the nation's largest mutual-fund company, has unusual strengths in production and operations (low expense ratios), in its distribution system (no middlemen), in customer relationships (exceptional loyalty), and in its fundamental structure (a mutual company owned by its investors). Each strength reinforces the others, creating a business that competitors can't match.

Differentiation may begin with the founders or leaders of a company, but it doesn't become real until the front line lives it and breathes it. That's why the most successful enterprises — companies with what we call Great Repeatable Models — translate their strategies into front-line activities and focus maniacally on routines.

James Allen is a partner in Bain & Company’s London office and co-leader the firm’s Global Strategy Practice. He is co-author, with Chris Zook, of the book Repeatability: Build Enduring Businesses for a World of Constant Change (HBR Press, March 2012).