How to develop a differentiation strategy ?

The strategy is a real roadmap that guides the company in its material, immaterial, human and financial choices. How do you develop it?

Strategy: the company's compass

Contrary to popular belief, strategy is not just for large corporations and other multinationals. In fact, it is fundamental and indispensable for any company that wants to survive in a competitive market over the long-term.

We are not talking here about a business plan, the primary use of which is to convince external parties of the need for funds at a given moment. Instead, we are talking about a thoughtful approach to maximising the probability of achieving a long-term objective in a specific competitive market.

Strategy is a true roadmap that guides the company in its choices, particularly the allocation of its resources.

It is clear that many VSE/SME managers have their noses to the grindstone and are exhausted due to constant fire fighting. They tend to lose sight of their long-term objectives.

However, it is essential that they gain perspective and understand their reference market, the trends, the participants, particularly customers, suppliers and competitors and their strengths and weaknesses. They will then be able to choose a differentiation strategy that will allow them to improve their profitability and strengthen their competitive position, notably through a better allocation of their resources.

Three generic business strategies

Based on studies by the Doctors of Management, Michael Treacy and Fred Wiersema, there are three generic strategies, summarised below, that companies can use to differentiate themselves from their competitors.

1. Operational excellence

Operational excellence aims to deliver reasonable quality at low prices with a focus on costs.

A company such as Colruyt operates according to this strategy by focusing on the supply chain, the efficiency of its processes and the economies of scale that enable it to reduce its cost prices by negotiating with its suppliers. This approach is characterised by a limited product range, no frills and a high degree of standardisation.

Such a strategy is generally not within the reach of small companies given the importance of size.

2. Product leadership

This approach consists of offering customers leading-edge products, whether in terms of quality, functionality, innovation or brand positioning. Apple is an excellent example of this. Their products are innovative, trendy and sell for a premium supported by an iconic brand.

This strategy can also be chosen by start-ups, VSEs and SMEs.

3. Customer intimacy

This third strategy is based on customer relationship/proximity and the excellence of the service/product provided to build customer loyalty.

Satisfying the customer's needs is the cornerstone of such an approach. We could almost talk about the "customer is king" strategy.

Customer intimacy is characterised by frequently adapting the product/service range, the decision-making power given to employees in contact with the customer and the importance of the customer's long term value (ref. lifetime value).

Most VSE/SMEs will be able to differentiate themselves using this strategy.

It is worth remembering that without a strategy, everything is a question of price, leading to constant pressure on the company's margins and therefore its viability.

How to develop a strategy ?

Here are 10 steps that will help you to implement a winning strategy.

1. Determine your personal aspirations

This step requires the company's manager to think "selfishly" about themselves. What do you really want from your company? What are your aspirations? These are the cornerstones of your future strategy. You make sacrifices, so it's only fair that you get to reap the rewards. Remember that "charity begins at home".

2. Define your values

A company's values are the principles on which it bases its development in its sector and its strategic decisions. These principles can be moral (loyalty to customers and employees, superior quality in all circumstances...), societal (respecting the environment, developing a more ethical business model...), take on a marketing dimension (customer proximity, adaptability...) or reflect a strategy (innovate, always be at the cutting edge...).

A company's values reflect the vision of its managers, how they conceive entrepreneurship and how it does business in relation to its customers, suppliers and other partners, as well as the behaviour and attitudes of its employees.

What are your values and why are they important to you?

Your values should be the DNA of the entire company, what it is, what it stands for and how it operates. Knowing your values is essential for making the best decision when prospecting for sales or recruiting employees. Sharing the same values is a company's sacrosanct cement.

3. Determine in which market you operate

Despite appearances, this point is far from trivial. We often tend to define our market according to our products and their functionalities, forgetting that the primary reason they were purchased is to meet a customer need. Understanding this need or the reason for a purchase is essential for gaining a broader view of your market and a better understanding of its participants and substitute products and developing a relevant and differentiating offer. Companies such as Nokia and Blockbuster (DVD rental) were displaced because they confused product and need. For example, we don't rent DVDs but films, we don't rent the medium but the content. Netflix has understood this.

4. Think big, be ambitious

Are you ambitious enough? Answering this question is about being in the moment and seeing the opportunities in your market in a broader way. Not what you feel comfortable with but what could be achieved. Thinking big means being able to dream, think outside the box and identify what is possible. Even if you were to achieve 50% of your vision, your growth would certainly be much higher than what you are currently experiencing.

5. Identify your opportunities

Opportunities are everywhere but you have to be able to see them and seize them. This does not necessarily require a radical transformation of your business. There are great opportunities right in front of you that you could seize with your existing product, services and customers.

6. Look at yourself in the mirror

It's good to dream and think big, but at some point, reality kicks in. This step requires you, as a manager, to carry out a critical and objective analysis of your company's strengths and weaknesses. Where does it excel? What are the areas for improvement? Where is it vulnerable and where does it have a clear competitive advantage? Are you offering your customers what they really want, when they want it, where they want it and how they want it?

7. Find your competitive advantage

Your competitive advantage is the essence of your business because it drives your marketing and operational activities. It allows your company to stand out in the market and ensures that your customers choose to do business with you rather than with your competitors. It could be the best product or service, the lowest price, the best quality, the most innovative ideas, the most qualified staff, an exceptional customer experience, optimal delivery service or any other factor that influences customer buying behaviour. Your competitive advantage cannot be easily copied.

Having a sustainable competitive advantage is the key to staying out of the price war.

8. Surround yourself with the right people

As small businesses grow, their structure often evolves accidentally. This step requires starting with a blank sheet of paper and drawing the ideal structure for the company as it should be and comparing it to the current structure in order to identify disparities. The manager must be able to recognise their own limitations and identify the complementary skills the company needs. 

9. Reorganise

After identifying the ideal structure, the staff need to be reorganised by retaining talent, training some employees, letting go of those who do not fit into the new structure and hiring new employees. This phase is easier to achieve if employees' opinions have been taken into account in the overall strategy and if they have been consulted and kept informed of what is happening and why.

10. Communicate

In order to give meaning to your action and unite your teams around your ambitious and inspiring strategic plan, you must not only communicate but also explain your company's mission, its values, its ambitions and the actions that will be taken to achieve them in the coming years. Involving your employees in the implementation of your strategy is a key success factor.

Conclusion

In conclusion, strategy is not an exercise in style but an essential step to ensure the sustainability of your business by differentiating yourself from your competitors.

However, as good as it is, it must be adaptable to new circumstances: even if your destination is clearly defined, you may have to change how you get there.

Without a differentiation strategy, you will find yourself on a battlefield from which you will probably not emerge victorious.

Writer: Aslam Bakkali, Business Doctors