Strategic Differentiation: Making Trade-Offs That Create Customer Value

strategic

While it’s easy to blame business failings on external factors like the economy, the truth is that more than 80% of business failures can be traced to a single cause – bad strategy. In my career, I’ve worked with more than 100,000 managers to help them develop their strategic thinking skills and what I’ve discovered is that one of the most challenging strategic issues organizations face is creating meaningful differentiation.

Creating, developing, and communicating real differentiation that fuels the delivery of superior value demands a carefully crafted strategy. It is a challenge that takes time, thought, and the courage to make trade-offs with one’s resources: choosing one path and not the other. The mark of a great company is that their differentiation creates trade-offs that competitors cannot or will not meet.

Many organizations stick with the status quo, or offer similar products or services in the same way as competitors, only aiming for slight improvements. But that is not true differentiation.

To help leaders approach differentiation strategically, I’ve developed a tool I call the Trade-Off Zone. This is a visual representation of the differentiation, or lack thereof, being made in a market. This approach identifies common trade-off factors that figure prominently in the customer’s value equation, and helps leaders gauge their organization’s differentiation relative to the competition and determine which trade-offs to make.

“Just as a real leader isn’t going to please all potential followers, a real strategy isn’t going to please all potential customers.”

For example, five common benefit factors are: 1) Quality 2) Convenience, 3) Cost, 4) Service and 5) Selection. Competitors are plotted in the low, medium, or high zone for each factor based on their performance delivering that benefit. Depending on the business, these factors can be used, or others can be substituted if they are more relevant to that specific market.

Once the factors are selected, managers can rate their organization’s offering for each of the trade-off factors as low, medium, or high, as seen by the targeted customer. Competitive offerings are then plotted, creating trade-off profiles, to determine where differentiation exists within the Trade-Off Zone. If your trade-off profile mirrors the competition. work needs to be done to determine the trade-off factors, targeted customers’ value, and how to create positive differentiation around them.

As an example, here is the Trade-Off Zone for two fictional companies—TechnoBody and Costazon—that I created for my book, “STRATEGYMAN VS. THE ANTI-STRATEGY SQUAD.” Using the Trade-Off Zone, it becomes apparent which benefit factors each company is using to steer customers to their offering. Customers with a greater demand for quality and service would be more likely to choose TechnoBody, while customers more interested in cost savings, selection and ease-of-use would prefer Costazon.

To construct a Trade-Off Zone chart for your business, first select the specific type of customer that your offer targets. In some cases, the root of poor strategy is trying to be all things to all customers. If some potential customers are not happy with how you choose to bring value to the market, it’s a sign that trade-offs have been made. The point is that effective strategy is going to upset some potential internal or external customers. Learn to live with it. Just as a real leader isn’t going to please all potential followers, a real strategy isn’t going to please all potential customers.

The trade-off profile should show points of difference among the benefit factors. If you are bringing differentiated value to customers, this will be reflected in differences in the Trade-Off Zone. If your offering is at parity, you’ll see competitive convergence or a mirroring of trade-off profiles with your competition.

Research shows that a majority of leaders deceive themselves into thinking they’ve cultivated valuable differentiation. But true differentiated value isn’t determined by you – it is determined by your customer, and it shows up in profits.

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