The 6 most mistakes made by companies seeking differentiation based on Porter’s competitive strategies

The 6 most mistakes made by companies seeking differentiation based on Porter’s competitive strategies

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The goal of any company is to achieve maximum profitability. According to Michael Porter, one of the world’s leading authorities on competitive strategy, there are only two ways to gain a competitive advantage:

  • low costs;
  • Differentiation.

These two concepts form the basis of any strategy vis-à-vis the competition, but the profitability of a company does not only depend on its positioning in relation to its competitors.

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It also depends on the structure of the sector in which it operates. That’s why it’s so important that a company’s leaders know perfectly well the industry in which they compete, especially the strengths and weaknesses of competitors and what types of intelligent segmentation they can do in their customer base (current, potential and inactive).

I often see companies trying to please all customers in the same way, which by definition is extremely inefficient and ends up creating a string of companies that are totally similar to each other in a given market or industry.

One way to avoid this is by studying your market. And, in this case, the best option is to use Porter’s 5 competitive strengths.

Porter’s Competitive Strategies: The 5 Market Forces

According to Porter, the profitability of companies depends on certain basic competitive forces, such as:

  • Rivalry with existing competitors;
  • Threat of substitute products or services;
  • Threat from new competitors;
  • Customer power;
  • Bargaining power of suppliers.

In this sense, according to Porter’s competitive strategies, there are 6 basic mistakes often made by companies when trying to develop a differentiation strategy.

The 6 mistakes in sales strategy and differentiation:

  1. Offering a product or service that, despite contributing greater value to the company, is not seen as such by customers and consumers;
  2. Exceed buyers’ needs;
  3. Fix very high prices;
  4. Not understanding the costs involved in differentiation;
  5. Not recognizing market segments;
  6. Create a differentiation that competitors can easily imitate.

Let’s look at each of them and talk about how to avoid them.

1. Offer a product or service that, despite contributing greater value to the company, is not seen as such by customers and consumers

There is a famous saying, often used in marketing (and politics as well), which goes:  Perception is reality.

That is, perception is reality. If customers don’t perceive you as adding value to their business, you don’t add value, period. To avoid this, the company must make an effort to educate its customers, clearly showing the benefits achieved by working together.

Although, as a nation, we are not very fond of statistics, it is time for Brazilian entrepreneurs to improve in this aspect, seeking to prove more objectively that their products and services “are worth what they weigh”.

In addition, our market is quite anemic when it comes to getting successful testimonials, another effective way to publicize the positive results of a particular product or service.

2. Exceed buyers’ needs

In the eagerness to delight their customers, many companies end up introducing totally unnecessary and superfluous novelties. Even if this doesn’t change the final price much, it is clear that without these “trinkets” the product or service could have a lower cost.

It’s important to delight customers, but it’s even more important to delight them with what they think is important.

In this sense, it is important that you ask yourself questions when defining your sales strategy:

  • What adds value?
  • What is just aesthetically pleasing?
  • What is superfluous?
  • How does this influence customer reaction when closing deals?

Find out what your customers value and use it as a weapon to delight them. The rest is wasted.

Remember that everything you present to the customer that they don’t value can be perceived as an unnecessary cost. You have a differential (which the customer doesn’t value) and you’re actually inducing a discount request.

3. Set prices too high

There are two ways to make money: charging high prices and having high sales volume.

Every entrepreneur’s dream is to have both, but we know that this rarely happens.

The high price has some advantages:

  • Fat margins (which help in marketing, as they can be distributed through commissions);
  • Elimination;
  • Status;
  • More money for marketing and advertising;
  • Etc.

But this has a limit.

The key is to find out what price will optimize a company’s profitability.

We must always think in terms of profitability, not just sales or revenue.

There is an ideal price (in terms of profitability) for each type of product or service, and the only way to find it is by testing it – up and down (I see companies that only test downwards… this is a very limited view and destructive of the pricing issue).

4. Not understanding the costs involved in differentiation

It may seem redundant to say this, but differentiation that brings more costs than benefits is detrimental to the company. Customers may love it, but what good is it if the company is losing money?

Differentiation is to be profitable and the two things (profitability and customer satisfaction) need to go together and not be mutually exclusive.

5. Not recognizing market segments

Many opportunities are missed because companies don’t recognize small niches in which they could be leaders without much effort.

Just adapt what you already have to the reality and demands of the public in these niches. This adaptation and agility are compensated with high levels of profitability, as people and companies are generally willing to pay a little more for products or services that are specific to their reality.

With small adjustments and the right attitude, you can quickly create customer segments and differentiation that they can value.

But you need to have the right attitude – if people (especially leaders) are already locked into the concept that there is no option, nothing can be differentiated, everything is a commodity, everything is price, etc., then there is no way.

As my father used to say, quoting a Spanish saying, “there is no worse blind than the one who does not want to see”.

6. Create a differentiation that competitors can easily imitate

True competitive advantage is one that is unique to your company. This can be done by working on the image (such as cigarettes and beers), investing money (in factories, real estate, patents, etc.) or, even better, by stimulating the creativity of the company’s employees. This can and should even be encouraged and trained in the team.

Ideas that lead to constant innovative actions are the biggest differential your company can have. But it needs to have an internal climate that allows not only people to have the ideas but to execute the ideas (excellence, efficiency and consistency in execution are BIG differentiators!).

As we can see, it is not enough just to try to differentiate yourself from the competition in any way.

There are actions that at first may seem beneficial, but which are actually harmful to the company’s financial health.

And the rules we all must respect are these:

  1. Perception is reality;
  2. Don’t offer more than necessary;
  3. Work with prices that maximize your profitability;
  4. Understand all the costs involved;
  5. Differentiate yourself also by working with niche markets;
  6. Finally: do things that are difficult to imitate.

If I may, I would ask Porter’s permission to add a seventh element to the list of mistakes based on Porter’s competitive strategies:

  • Train your team (the real difference that every company should have). And in that, the cover story of this issue can be very useful!

Hug and good sales,