Supporting the Digital Differentiation Strategy

For businesses to effectively compete in the marketplace it is important to distinguish between competitive strategy, competitive advantage and operational effectiveness. Importantly, it is important that managers are acutely aware of the symbiotic relationship between operational effectiveness and competitive strategy and how they support the development an enduring competitive advantages.

Competitive Strategy is the course of planned actions that are undertaken to create a value proposition for the customer. Moreover each action typically interacts and reinforces the other activities to create a competitive position in the marketplace. Operational effectiveness on the other hand is about efficiency. Doing similar things to the competition but in different yet more efficient ways whilst supporting the competitive strategy (It does not mean benchmarking the competition - more on that another time). By combining these two well, a company may only then be best placed to develop a competitive advantage.

In this article I will attempt to explain why a digital differentiation strategy devised in isolation is not enough. More to the point, we must consider differentiation in conjunction with effectiveness of software production if we are to have any sort of hope of developing outsized economic returns over the long run.

A Hypercompetitive Marketplace

Analysing strategy is difficult, developing new strategies is more difficult, developing strategies that allow your business to endure is more difficult yet again. Compounding the difficulties is that the marketplace is changing at breakneck speeds. Since the mid 1990s, the concept of “hypercompetition” is one which suggests that competing, let alone sustaining competitive advantages, is becoming increasingly more difficult regardless of industry. There are numerous bodies of research which suggest sustaining any sort of competitive advantage is now less about a single advantage maintained over time and more about concatenating a sequence of advantages over time. In their coverage of the subject of competition Wiggins & Rueffli (2001, 2005), explain:

• The duration of the periods of superior economic performance (relative to industry) are getting shorter.
• Hypercompetition is not just about high technology industries. It exists in both low and high tech industries.
• The best companies are able to string together multiple, yet smaller and more short lived, competitive advantages.
• Large market share does not mean sustained advantages.

We don’t need to look too far for examples of how the environment in which businesses in is becoming increasingly more difficult. The rapid rise of platform model businesses digitally disrupting countless traditional markets; the ever decreasing tenure of the top firms in the S&P 500; the large decrease in product development lifecycles - to name but a few are all simple examples of how the marketplace is becoming hypercompetitive. Undeniably digitalisation is a (the) key driver.

Differentiation

We can easily appreciate why commoditised products should be avoided where possible. As products become commoditised customers increasingly make their decisions based on price and brand loyalty becomes less relevant. Commonly used in digital strategy by both clients and consultants alike, differentiation is one of Porter’s three generic strategies for competing in the marketplace. In a world of lookalikes and me too digital products & services the idea is a simple one, don’t allow your product to become a commoditised service. By differentiating your product from the competition’s your customers see you as unique in the marketplace. This seems like a reasonable assumption.

The idea goes something like this: businesses which differentiate their products & services will face less competitive rivalry because brand loyalty and unique features will result in less price sensitivity. Differentiating should see the power of buyers weakened as comparable alternatives become harder to find and compare. Ultimately this should lead to better pricing power and thus higher margins. The ideas behind this strategy are simple enough to understand and for this reason this strategy is widely deployed across industry.

So differentiation is a good thing right? I reason that it’s not as simple as that. Many differentiated (digital) products compete in markets where there are questionable barriers to entry and thus differentiation alone is not enough. Yes, differentiation is a reasonable strategy for competing however it does not necessarily provide the competitive advantage needed to endure the market challenges. It is the limited barriers to entry and not the lack of differentiation that is more often than not the problem. Differentiation can help protect your product from becoming commoditised but it won’t protect the product from intense competition. Especially as copy cat competitors look to emulate your clever ideas.

Online stock brokers provide a good case to consider. Largely commoditised with very little tangible difference between them the only way to compete is through differentiation. However this benefit is usually always short lived. As the early adopter releases his robo advisory platform, it does not take long before the others follow. As one releases its digital low-research/low-commission service it doesn’t take long until the others follow suit. It’s a continual cat and mouse game.

The choice to differentiate does not come for free and the idea that by simply building something different and ending up with above average returns is too simplistic. Often, creating differentiation comes with higher costs, thus pricing must be at a premium that exceeds the costs used to execute the strategy. For example, higher costs around educating customers about the benefits of the differentiated features. Also, research and development costs can be far higher for differentiated products as features are often untested and uncertain and thus more expensive to produce. Yes, this strategy could see better pricing power but this does not necessarily translate into higher margins or higher sales.

Importantly, differentiation as a strategy comes with higher risk as it requires a level of constant creative destruction and reinvention to fend off rivals and new entrants looking to emulate successful features. Differentiation by definition means that the planned features do not yet exist and there is no certainty of the customer uptake. In a hypercompetitive environment, there is pressure to get each iteration right - getting it wrong can be costly or at worst, fatal. We only need to look to Snapchat’s recent changes to it’s feed as it looks to differentiate further from Instagram. The term “value destroying” comes to mind.

To expand on this idea further, the more competitive a marketplace, the less effective differentiation becomes. Kim & Mauborgne explain that the ultimate goal of differentiation should not be to take differentiated products into existing competitive markets where the differentiated differences become too small to matter. Instead, differentiation is about defining uncontested market spaces where competition is less whilst at the same time focusing carefully on efficiency and cost reduction. Ultimately, this should lead to the delivery of both more value at lower cost (to the customer). This is a real departure to the traditional view trading off between value and cost.

Efficient Software Production Methods Support the Differentiation Strategy

We now understand that employing the differentiation strategy in isolation will not necessarily lead to a sustainable competitive advantage. Differentiation is simply not enough to see you through. Whichever view you take, there is no doubt that flexibility and adaptability are critical.

In the digital world, a company must organise it’s whole software production system around pursuing differentiation effectively. This means that those businesses employing the differentiation strategy for their digital services it is critical that there is an intense focus on software production efficiencies. That is the ability to be able to rapidly iterate based on continuous feedback, continual learning and technical efficiency. This means the ability to release new features on demand as and when new features have been developed. If you can’t do this then you are playing a risky game.

To achieve this, at all steps of software development process there must be fast feedback loops so the whole team can quickly see the impact of their actions. Features are developed together with the business, code is continuous, automated tests are run, code is automatically deployed. Failures are quickly relayed upstream for rework. Otherwise known in tech circles as “Devops”, companies employing this strategy see better productivity, market share and profitability. High performing devops teams outperform their low performing non devops rivals in the following areas:

	High	Medium	Low
Deployment frequency For the primary application or service you work on, how often does your organization deploy code?	On demand (multiple deploys per day)	Between once per week and once per month	Between once per week and once per month
Lead time for changes For the primary application or service you work on, what is your lead time for changes (i.e., how long does it take to go from code commit to code successfully running in production)?	Less than one hour	Between one week and one month	Between one week and one month
Mean time to recover (MTTR) For the primary application or service you work on, how long does it generally take to restore service when a service incident occurs (e.g., unplanned outage, service impairment)?	Less than one hour	Less than one day	Between one day and one week
Change failure rate For the primary application or service you work on, what percentage of changes results either in degraded service or subsequently requires remediation (e.g., leads to service impairment, service outage, requires a hotfix, rollback, fix forward, patch)?	0-15%	0-15%	31-45%

Source: 2017 State of DevOps Report

This is an exciting shift from the traditional periodic release approach that most of us know. The typical bureaucracy surrounding software production is reduced. Feature releases are smoother because the problems are found and reworked earlier when they are easier and cheaper to fix. This short feedback loop fosters a stronger learning culture so new iterations can be implemented and similar problems can be addressed quicker and easier in the future. Addressing technical debt through refactoring code and architectures can be done with more confidence. Development teams are happier.

Importantly, all of a sudden your service development starts moving faster. All of a sudden you can start differentiating your product based on the customer’s needs. For companies not employing this release fast mentality they will find it difficult to compete.

In other words, devops gives your digital business a serious boost in supporting the differentiation strategy. Without the ability to act quickly, a business’s differentiation strategy will threatened by those who are more nimble and more adaptable.

Conclusion

Differentiation is a real strategy but alone it is not one that will guarantee a sustainable competitive advantage. Businesses which choose to employ a differentiation strategy must be aware that if they can’t operate efficiently by reorganising their operations to support this strategy they will open themselves to attack from their more efficient rivals. The consequence of this is lower returns on the investment made to differentiate themselves when compared to their better run rivals. The bottom line is that differentiation is not enough. You MUST be able to support the ability to release fast, iterate rapidly and measure outcomes quickly. Some people call it Agile, I just call it smart.

References

Hypercompetitive Performance: Are The Best Of Times Getting Shorter? , Wiggins & Ruefli, 2001

Schumpeter’s Ghost: Is Hypercompetition Making The Best Of Times Shorter?, Wiggins & Ruefli, 2005

Competitive Strategy, Porter, 1980, Free Press

Blue Ocean Strategy, Kim & Mauborgne, 2015, Harvard Business Review Press

The Devops Handbook, Kim, Humble et al, 2016, IT Revolution Press

2015 State of DevOps Report, Kersten, IT Revolution & PWC