Jan 262012
 
Share

The Importance of Differentiation and Adding Value

The Importance Of Differentiation And Adding Value

There are many ways to add value and establish differentiation in a given situation.  Some are just more differentiated and “valuable” than others.  Why do you think it is that the top salesperson at a company often earns more than the CEO?  It is for this very “value-added reason”.  The value-added of a top salesperson is easy to identify and quantify.  It’s how much of the company’s product or service they sold over a certain period of time.  And in many companies that are a bit more sophisticated in their measurement of value-added, it’s how much they sold AND the profitability of those sales.  In the end analysis, adding value is not just about generating sales; it’s about generating PROFITABLE sales.  The salesperson represents the vehicle for the company to monetize and capitalize on the value it adds and its (hopefully) differentiated position in the marketplace.  Keep this in mind as you’re thinking about your own value-add and differentiation scenario and strategy.

Let’s look at a few examples, to consider the range of value-adding and differentiation possibilities, as well as the implications for various types of businesses.  We’ll take a look at value-add in the context of a couple of well-known brands and industries.

Example #1:  Your Cable TV Provider

Value-add:  They provide you with connection to the outside world.  These days they provide access to TV, movies on demand, VOIP phone service, and Internet access.  The list of offerings continues to grow.

Differentiation:  They’re not highly differentiated from alternative suppliers of any of these services, thus they’re relatively commoditized and the main battlefield for competition is price.  They also sell and attempt to differentiate based on bundling offers and convenience.  Competing on price is not a strategy for long-term success, unless you’re a massive commodities trading firm.

Example #2:  Apple

Value-add:  They provide you with communication, entertainment and computing power in a stylish way, with a very user-friendly and intuitive interface.

Differentiation:  They’ve been very clever in making their brand “kool” and synonymous with creativity and self-expression.  In so doing, they have transcended computing and entertainment, which has led to their becoming one of the most highly valued and profitable companies in the world.  Their products typically are 25 to 50 percent more expensive than competing products, a difference their enthusiastic and loyal users usually don’t even blink at.

Example #3:  Boston Consulting Group

Value-add:  They provide strategy consulting to many of the biggest and most successful companies, governments and other organizations around the world.

Differentiation:  They, like the few others at the top of this industry, such as McKinsey and Bain, have a reputation for hiring only the best and the brightest.  They work with senior management and Boards of Directors and focus on high-level strategy.  They do multi-million dollar projects and play at the top of their field.  Like McKinsey and Bain, BCG is a private company, so their financials are not public, but by all accounts, their differentiation has led them to be among the most profitable and influential consulting companies in the world.

We could go on and on with examples, but you get the idea.  Either companies (and/or individuals) find a way to differentiate and add meaningful value, or they find themselves on the road to commoditization, price competition, and a struggle to maintain their profitability and ultimately, their existence in the marketplace.

Where do you as an individual, and where does your company as an organization, add value in the marketplace?  How is that differentiated from what every other “player” in the game is doing to add value?  How well have you been able to position yourself and your offerings as adding meaningful value in the marketplace? The answers to these questions are CRITICAL, because without differentiation, you have commoditization, which is not a path you want to take.

I realize that to some extent, these concepts of value-add and differentiation are “strategic thinking 101,” but what I see in my own businesses and advisory work is that too many people, even otherwise excellent CEOs, can fall into the trap of not seeing commoditization creeping in from every angle.  Most markets these days are extremely dynamic.  You need to make sure that you and your business remain dynamic as well and constantly examine ways to add more value, differentiate, and stay a step ahead of the commoditization reality.  If possible, like Apple, you want to create loyal and enthusiastic fans.  Having a connection with your customers on such an emotional level is a major step in the direction of fighting off the natural tendency toward commoditization.

I look forward to your thoughts and questions.  Please leave a comment (“response”) below or in the upper right corner of this post.

Paul Morin

paul@companyfounder.com

www.companyfounder.com

Don’t miss an issue of Company Founder! Subscribe today.  It’s free.  It’s private.  It’s practical information for entrepreneurs and leaders interested in taking it to the next level.

Go to the right-hand navigation bar near the top of the page, enter your email and click subscribe.  We respect your privacy and will not sell your email address.  Note:  once you subscribe, if the confirmation email doesn’t arrive, check your spam filter.  It usually makes it through, but sometimes those pesky spam filters don’t know what is good..

Share
Sep 102011
 
Share

Differentiate. Don't become commoditized.

Differentiate.  Don’t Become Commoditized.

How do you differentiate your company and its offerings in the marketplace?  What do your products and services provide to your customers that add value to them?  Is what you offer differentiated from what your competitors offer, or are you at risk of becoming “commoditized”?

What does it mean to be commoditized, you may ask?  The way I’m using the term in this article, it means that the product or service that you’re providing has absolutely nothing that differentiates it from what other providers in the market are offering.  That would be “fully commoditized”.  There may be other cases where there are some small differentiating factors, but even though in that case you’re not fully commoditized, effectively you are, because in the minds of consumers those differences are minimal and relatively meaningless.

Ok, so what are the implications of being commoditized?  Is it a good thing or a bad thing?  As you can imagine from the way I’m describing it, from your perspective as a provider offering your services or products in a “commoditized” market, it is typically a very bad thing.  I could illustrate the negative effects of commoditization for you with numerous examples from my entrepreneurial and advisory career, but I will use just one that occurred recently, which I think will be more than enough to get the point across.

A few of the facts in the example I’m about to provide you have been changed to protect the innocent, the guilty and the commoditized.  None of those changes has any impact on the point of the story.

Last week I was on a conference call for one of my businesses regarding a deal with a total value to the service provider of roughly $250,000 and a total potential implication for the customer of more than $25 million over time.  The deal was in the information space.  The service provider in this case was essentially a broker (aka intermediary) who, in the eyes of the customer, brought no more value to the table than introducing the buyer and seller.  The service provider has several large competitors, not quite as large as they are, but large nonetheless, that offer essentially the exact same brokerage services.

The story got interesting last week because this service provider, who had been doing business with the customer for five years, decided to try to introduce a limitation of liability clause into their contract for the upcoming service year.  They wanted to limit their liability to $5 million for any mistakes they made, even though the implications or damages for the customer could be as high as $25 million.

To further set the stage, the service provider has roughly $10 billion in revenues, the customer has about $400 million in revenues and we’re even significantly smaller than that.  So you can imagine that in a normal negotiating scenario, this large service provider would simply “have their way”.  They would say, “take it or leave it”; there’s now a $5 million limitation of liability in the contract and if you don’t like it, too bad.

As you can probably guess from the subject matter of this article, that’s not how this story went.  When this service provider tried to introduce the limitation of liability into the contract, they’re the ones who ended up hearing “take it or leave,” not the much smaller customer.  They heard things like, “you’re selling a commodity,” “none of your competitors are looking for a limitation of liability,” “the only place you can really compete is on price”.  I could tell, not surprisingly, from the tone of the call and the deliberate, unanimated voices of the attorney and other negotiators for the service provider, that they knew we were right.  They were literally powerless in the discussion, with no negotiating leverage.  Their salesperson made some weak pleas and arguments about how they had a better team and how they could use their size on our behalf in the marketplace, but in the end, it fell on deaf ears.  We knew it was just hyperbole and the reality was that they had been “fully commoditized”.  We told them to remove the limitation of liability, or we were moving to a competitor.

Hopefully this example illustrates for you the extreme danger of becoming “commoditized”.  You lose all power.  The only real place you can compete is on price and typically, that’s a losing game.  Unless you are a large trading company, doing a huge volume of business, competing in a commodity market is generally a losing game.  Try to be as proactive as possible about finding ways that you can differentiate your company and very importantly, its offerings, so that they are at least perceived to be different in the marketplace.  I’ll give you one example of where I’ve seen that done very well, before we wrap up this article.

For those of you who live along the mid-Atlantic coast of the United States, or have visited there, you may be familiar with a convenience store and gas station chain called Wawa.  There aren’t too many businesses that are more commoditized than gas stations, but as Wawa has exemplified, it is quite possible to differentiate on the convenience store aspect of the operation.  I may not even have realized how differentiated they were, if not for my kids.  Every time we take a road trip from our house in the southern part of the U.S. to visit family in the mid-Atlantic and Northeast, the first thing I hear from my kids, several hours before we get anywhere near a Wawa is:  “Dad, when we get to Maryland, can we stop at Wawa for lunch”.  Amazing!  It’s a convenience store, not a restaurant!

So how has Wawa won the hearts of my kids?  They have a great deli, with innovative electronic ordering machines where you can customize your own sandwich and get all the stuff you love on it.  It’s not cheap, mind you, but that of course is of little relevance to my kids.  It is also very clean inside, unlike many gas station convenience stores you may enter.  That includes the bathrooms, the cleanliness of which is, of course, extremely important.  The employees are also well-trained, friendly and proactive in making sure that you are finding everything you want.  In short, it’s a very well run operation, with great food, in a place where you wouldn’t expect to find it.  So unlike the service provider I mentioned in the example above, Wawa has not been commoditized.  I cannot simply say to my kids, “don’t worry, we’ll just stop at some gas station and deli down the street, as it’ll be the same”.  It won’t be the same, my kids know it and they’re not happy with anything other than Wawa.

What do you do that differentiates you in the marketplace?  Think it through very carefully and to the extent possible, make sure it’s not just one thing.  Also, make sure you keep paying attention when you’ve been in business a while.  There can be a tendency to get complacent and “rest on your laurels”.  That’s when other competitors come along and recognize changes that are happening in the marketplace, take advantage of those changes and do what Wawa did in a market that had been commoditized years before.

Becoming “commoditized” and being powerless to negotiate on any aspect but price is a very bad position to find yourself in.  Be proactive and do everything you can to make sure it does not happen to you and your business.

Epilogue:  We recently had the follow up call with the service provider who wanted to insert a limitation of liability (LOL) in their contract, when no competitor was doing the same.  The service provider told us that they could not move from the $5M LOL.  The customer simply told them that there was not much more to talk about then.  The service provider will need to serve out the couple of remaining months on the current contract, as they’ve already been paid for it, but will have no involvement in future intermediary services for this customer.  One of the service provider’s competitors is willing to take on the business without any LOL and it looks likely that the overall cost to the customer will be less.  That’s the beauty of competition for the buyer and it’s an important lesson for all of us:  do not let yourself become commoditized!  If you do, rather than standing for limitation of liability, LOL will stand for “laugh out loud” on the part of customer, when you try to introduce one-sided changes into your contract, or try to apply leverage into negotiating anything.  If you’re commoditized, you will have little to no leverage — an unenviable position.

I look forward to your thoughts and questions.  Please leave a comment (“response”) below or in the upper right corner of this post.

Paul Morin

paul@companyfounder.com

www.companyfounder.com.

Share
Aug 152011
 
Share

Do You Truly Add Value?  Are You Differentiated?

Whether you are an employee or an entrepreneur, you will want to ask yourself this question:  Do I truly add value? If you’d rather use more popular terminology, it would be:  What’s my value-added?  Either way, answer honestly.  Also, ask yourself, am I differentiated?  Your present and future livelihood depend on the answers to these questions.

What is meant by value-added?  Since we’re focused on entrepreneurship and leadership, I will answer from that perspective, but if you are still an employee, the same logic applies.  Value-added simply means that in any transaction or activity with which you are involved, what value are you contributing?  The funny example I always think of is when there are three people standing around filling a pothole on the road, with two leaning on their shovels and the other one doing all the work.  In that case, the one actually filling in the pothole would be adding value by exerting physical force to get the job done.  If you were being generous, you’d say the other two may be providing moral support and/or direction.  If not, you’d say they were not adding any value and were simply taking up space and “converting oxygen to carbon dioxide”.

Let’s look at an entrepreneurial example.  Let’s say that you are a broker or “intermediary”.  There are hundreds of different types of intermediaries, but let’s use the example of an M&A advisor.  More specifically, in this example, let’s focus on a sell-side M&A advisor – someone who advises people selling their companies.  You will hear such a role referred to as everything from “business broker” to “investment banker”.  Each label used has different connotations which generally differentiate between the size and sophistication of the deals handled.  You’ll often hear the term “business broker” in the context of selling smaller “mom and pop” type businesses, where the term “investment banker” usually is used in the context of larger and more complex deals.

What is the true difference between the value-added of a “business broker” and an “investment banker”?  Often, not much, but sometimes the difference can be dramatic.  A “business broker”, in many cases, is at least perceived as doing not much more than matching a buyer with a seller.  Such value-added certainly is vital in getting any transaction done, but it’s seen as commoditized, as it often does not involve much specialized knowledge.  The value-added of an “investment banker,” on the other hand, is often perceived as including match-making PLUS deal structuring, negotiation, usage of an extensive network of other high-level tax, accounting and legal professionals, etc.  While in reality, these differences may not always exist, that is usually the perception and for this reason, “investment bankers” are perceived as adding more value and therefore, they typically end up earning significantly more compensation than “business brokers”.  In this game of added value and differentiation, often times positioning and perception are just as important as reality.

How does this value-added and differentiation picture look in your product or service business?  What is the “special sauce” that you bring to the table that makes prospective customers want to choose you or your company and its offerings?  If your answer is “not much,” you need to begin to remedy this right away, because just as in a workplace environment, particularly in lean economic times, those that can’t point to specific, differentiated added value that they are bringing to the table, are typically among the first to be shown the door.  The corollary to that is, even if they’re not shown the door, they’ll often have to work for less compensation, just to keep the client or the job. Without demonstrable value-added and the ability to position themselves appropriately, they simply have no leverage in keeping their current clients or finding new ones.

Why do you think it is that the top salesperson at a company often earns more than the CEO?  It is for this very “value-added reason”.  The value-added of a top salesperson is easy to identify and quantify.  It’s how much of the company’s product or service they sold over a certain period of time.  And in some companies that are a bit more sophisticated in their measurement of value-added, it’s how much they sold AND the profitability of those sales.  In the end analysis, adding value is not just about generating sales, it’s about generating PROFITABLE sales.  Keep this in mind as you’re thinking about your own value-added and differentiation scenario and strategy.

Where do you as an individual, and where does your company as an organization, add value in the marketplace?  How is that differentiated from what every other “player” in the game is doing to add value?  How well have you been able to position yourself and your offerings as adding significant value in the marketplace? The answer to these questions is CRITICAL, because without differentiation, commoditization, which typically yields a scenario of lower prices and profits, will soon be knocking at your door.

I realize that to some extent, these concepts of value-add and differentiation are “strategic thinking 101,” but what I see in my own businesses and advisory work is that too many people, even otherwise excellent CEOs, can fall into the trap of not seeing commoditization creeping in from every angle.  Most markets these days are extremely dynamic.  You need to make sure that you and your business remain dynamic as well and constantly examine ways to add more value, differentiate, and stay a step ahead of the commoditization reality.

I look forward to your thoughts, comments and questions on the topics of adding value, differentiation and commoditization.  Leave a comment below!

Paul Morin

paul@companyfounder.com

www.companyfounder.com.

Share