You can’t prevent your business model from eroding. But you can build a company that’s capable of managing business-model transitions. One way to do that, says Columbia Business School professor Rita Gunther McGrath, is to develop the habit of thinking creatively about differentiation.
McGrath first espoused this theory in her classic Harvard Business Review article, “Discovering New Points of Differentiation,” which she coauthored with Ian C. MacMillan in 1997. McGrath and MacMillian noted that companies, in seeking to differentiate themselves, had become too focused on end products or services and, as a result, were missing other opportunities to interact with customers.
“We believe that if companies open up their creative thinking to their customers’ entire experience with a product or service — what we call the consumption chain — they can uncover opportunities to position their offerings in ways that they, and their competitors, would never have thought possible,” they wrote.
That was 15 years ago. Build recently caught up with McGrath to ask what has or hasn’t changed since then. Here are a few highlights of the conversation.
How has your thinking about differentiation changed since 1997?
The importance of customer-experience innovation has risen significantly. In fact, I think conventional product/service differentiation is being copied or leapfrogged so quickly now that it is highly unusual for them to last as advantages at all. Take pharmaceutical companies, for instance: They’ve competed for years on “the tablet” that is a miracle cure. With generics breathing down their necks and fewer blockbusters to point to, they are going to have to look at the whole experience more holistically to find their next set of winning strategies.
What tenets of the article still hold up the strongest, today?
That all too often companies focus on what they do, rather than what the customer wants to accomplish. Typically they’ll focus on something like usage or engineering, when what gives a company an advantage may have nothing to do with those things. A simple example is the “one click” and “prime” combination offered by Amazon.com. Once you’ve paid the $79 annual charge, shipping is free and they already have all your details, so for buying something straightforward, why go to a site where payment and delivery are more cumbersome or expensive. And yet, for years, competitors focused on the web site functionality and trying to beat Amazon on price, when that had nothing to do with the customer experience.
Do you feel as if the main concept of the article — thinking about differentiation throughout the consumption chain — has permeated the business culture?
It has definitely not permeated the business culture, or we would not see so many new offerings flop and businesses struggling as their customers move on. Some companies do “get it,” and they are the ones that are having the best success from their investments in innovation. Square Enix [is] a terrific example. Others include Procter & Gamble, DuPont, IBM, Amazon, and Berlitz.
Berlitzis a particularly interesting case, as they took a very traditional classroom-based business model and used customer insight to dramatically shift their emphasis. The head of Americas in fact actually used the technique in the article to drive that transformation. Among the things he was able to do was to economically offer Arabic lessons by aggregating demand across multiple geographies. It’s a great story.
But if you think of most companies that directly serve consumers—airlines, credit card firms, cable companies, phone operators — it’s pretty clear that huge opportunities for creating better experiences are simply lying fallow.
How can a systematic effort at differentiation throughout the consumption chain help executives prevent their business models from getting disrupted?
I’m not sure you can prevent old models from eroding and new ones from emerging. You can, however, build an organization that manages transitions more effectively. Infosys would be a great example of a company that uses incredible discipline to phase out of fading models quickly and move on to new opportunities fast. The problem with many mature organizations is that they tend to allow power and resources to be held hostage to the currently successful business model, rendering their efforts to innovate ineffective. Poster child: Kodak. Although they were incredibly innovative and invested in diversification the political center of gravity of the company created this incredible inertia which eventually brought them to bankruptcy. It didn’t help that their supposed strategy for revival was to aggressively enter an industry segment (printers) that was already in decline.
Next likely victim: HP. Hope that doesn’t happen, but the handwriting is certainly on the wall.
McGrath isn’t the only academic connecting the dots between differentiation and disruption. In a June 2011 interview with MIT Sloan Management Review, Michael Cusumano, professor of management at MIT Sloan, argued that managers should use differentiation and agility to position themselves for evolution and success.
Meanwhile, McGrath’s coauthor, MacMillan, is the Dhirubhai Ambani Professor of Innovation and Entrepreneurship at Wharton. A few years ago, he was interviewed for a podcast called “How Entrepreneurs Can Create Effective Business Plans,” in which he stressed the importance of probing the consumption chain for opportunities. “You need to find the people who you think will buy your product and talk to them about what dissatisfies them with their current offerings,” he advised. “You should get a sense from them about who is providing the alternative at the moment. Remember, the world has gone for maybe 100,000 years without your idea — and people are getting by.”
For more on Infosys and its business-model innovation, we recommend another HBR piece, “The CEO’s Role in Business Model Reinvention,” by Vijay Govindarajan and Chris Trimble. Their “Does Your Team Have Enough Outsiders to Be Innovative?” quiz was a hit in the inaugural Build.