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Ted’s Blog: Discussing critical industry issuesThe Garrison Report #2002-12
The Keys to Developing a Competitive Strategy—Part 2
The Garrison Report in November discussed the first of the three generic ways to develop a competitive advantage, low-cost provider. This month’s Report will focus on the second method, differentiation, while next month’s Report will discuss the niche experience.
A primary benefit of differentiation is it’s an easier business strategy to defend, which is especially important in highly competitive marketplaces. It also increases profit margins because customers become less cost sensitive when you offer something others can’t deliver.
Many businesspeople believe outperforming their competition is the key to success, but that is not enough. Further, too many contractors define projects by the plans and specs. This is a big mistake because the plans and specs represent the commodity portion of the project, and we all know that people buy commodities based on price. Therefore, it’s critical that the contractor expand the scope of the project beyond the plans and specs, the very heart of differentiation, because it’s close to impossible to differentiate the commodity portion of the project.
Quality is a perfect example. Many contractors attempt to compete on quality, but good quality only gets you invited to the game; it doesn’t necessarily include an opportunity to play! There are differences in quality among contractors, and while poor quality might get you eliminated, it’s difficult to differentiate the best contractors based on quality alone.
Differentiation is about being unique. This can be accomplished through design, technology, services and even location. For example, Gorski Construction in Collegeville, PA, does more than simply build the customer’s building; it designs the building and sells them the land. By controlling the design and the land, the company can control the entire process. When a fire destroyed a facility, the company needed a new building as soon as possible. Since Gorski could control the entire process and provide a quick and reliable solution, the company quickly turned to Gorski and awarded it a contract. In essence, Gorski had no competition.
Oh, I hear those complaining, “But I don’t want to do design or invest in land.” I’m not suggesting that you do; I’m merely pointing out two ways to differentiate your company. What you must do is examine your customers’ needs and your company’s strengths and decide what you can do differently than your competitors. The point is that if you don’t differentiate yourself, you will always be competing on price.
How do you differentiate your business?
There are three important factors to consider in developing a differentiation strategy. These include understanding demand, knowing the competition and evaluating your competitive position. Let’s examine these briefly.
Demand is critical. You can’t survive if you’re competing in a specialty with insufficient work to support your company. Of course, sometimes you can create demand, but there is a big difference between latent demand and no demand. But the sooner you realize that there is insufficient demand, the easier it will be move on to fight another day. In many markets the demand for bid work exceeds the supply of bid work, so some contractors must move on if they want to survive. The other option is to use differentiation to develop a strategic advantage for certain types of bid work. This will allow you to develop special skills to compete more cost effectively in certain areas.
Knowing your competition is critical if you will avoid getting blindsided. Most contractors recognize the obvious competition (other contractors or new contractors to the area). However, contractors need to realize in difficult times, customers may elect to self-perform. But maybe the most formidable competition is the option to do nothing! To survive, a contractor must understand its marketplace.
Next you must evaluate your competitive position. How can you differentiate yourself from your competitors so you attract the customer’s attention? The key is to expand beyond price and quality. The good news is there are several other options including the following:
¨ Service: What special services do you provide? Are you flexible to the customer’s needs? Do you offer a design-build option to provide one-stop shopping for the customer?
¨ Speed: Time is money to customers. Leverage this to your advantage.
¨ Experience: What special skills do you have to meet the customer’s needs and concerns? Do your actions support the customer’s operations? For example, handling cleanliness for a food manufacturer can be a boon to a customer.
¨ Access: This applies more to service contractors.
¨ Communication: The construction process can be intimidating to many customers. Can you remove the stress for the customer?
¨ Risk: Minimizing risk to the customer is a huge advantage.
¨ Place: Own the property.
There are as many ways to differentiate yourself as there are customers. Your aim is to uncover the customer’s unique needs and deliver them. For example, I had one client who spent $18,000 to identify the special needs of its customers and train staff accordingly. This client, a $20 million general contractor, increased its project fees by 1 percent. It increased its fee by $200,000 annually by investing $18,000 in special differentiating services. Not a bad investment!
Summary
Don’t mistakenly believe that a differentiation strategy will allow you to ignore costs, but instead of competing on price alone, now price must be only competitive. Therefore, differentiation allows you to earn an above-average return in your area of the industry. More important, uniqueness builds customer loyalty and avoids competing on price. While not every customer will be willing to invest in the extra services, the increased profit margins will decrease the pressure on volume. Calculations indicate a 20 percent increase in project fees will allow a 44 percent decline in volume before there is a lowering of net profits. Enjoy being different!
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