Innovate Where You Differentiate

There is a belief in the world of innovation that everyone should be innovating everywhere. Although engaging all your employees is, indeed, a great idea, innovating everywhere is a mistake. 

Not all opportunities in your organization are equal. You can’t solve every problem. If you try to be great at everything, you’ll be great at nothing. Instead of trying to solve every problem, you want to innovate only where you differentiate. Focusing your energy on those activities and opportunities will have the greatest positive impact on your organization. Differentiating opportunities will help you stand out from the competition.

Identifying differentiators requires time and guidance. It is difficult to do on your own because of your blind spots. However, there is a useful framework that will help you get started: the 5Ds of Differentiation. All good differentiators include each of these five attributes:

1. Distinct: It sets you apart from the competition.
2. Durable: It is difficult for someone else to replicate.
3. Disruption-Proof: It will stand the test of time in a fast-changing world.
4. Desirable: People are willing to pay for it.
5. Disseminated: People inside and outside your organization are familiar with it.

Distinct

The key to being distinctive is to do something that sets you apart from the competition. This is the “different” in differentiation. It is why customers do business with you and not someone else.

Let’s take a look at an example. Two insurance companies, State Farm and USAA, have distinctive strategies. State Farm’s motto is “Like a good neighbor, State Farm is there.” The company has the largest distribution network of independent branded agents. Having a local, personal presence nearly everywhere has secured State Farm’s position as the largest insurance company, with 21 percent of the home insurance market.

USAA, on the other hand, offers insurance and financial services only to those in the military and their families. The company’s mantra is “Serve those who serve the country.” Each year, USAA retains 98 percent of its members, and 92 percent say they will never leave.

Durable

You need to protect your differentiator. This could be done with legal structures like patents and trademarks, but more often, the key is to focus on differentiators that will be difficult for others to replicate.

A client of mine thought that their pricing models were their differentiator. But when I asked how soon the competition replicated any new pricing models they introduced, I was told that it happens, on average, within two weeks.

This is not a unique differentiator. And it is certainly not durable. This is you doing the hard work for your competition. After doing some analysis, we found their true differentiator.

Disruption-Proof

Companies and industries are being disrupted on a regular basis. New companies, emerging technologies, and shifting buyer behaviors can quickly render a company’s business model irrelevant. To stand the test of time, you need to make sure your differentiator is disruption-proof.

To be clear, being disruption-proof does not mean your differentiator needs to change the rules of the game. You don’t have to be disruptive in order to be disruption-proof. However, you do need a differentiator that’s not going to become worthless in the future. Uber disrupted the taxi industry’s monopoly as the only paid hailed-ride service. Airbnb is changing the hotel industry, 3D printing is beginning to impact the supply chain, and blockchain is causing heartache and opportunity in financial services. Meanwhile, artificial intelligence (AI) is disrupting nearly every business in every industry.

The moral of the story is that what made you special in the past may no longer be sufficient.

Disruptions are just about technology: Societal changes are affecting every industry. Tobacco companies, for example, are continually facing increased pressure from regulators. Soft drink manufacturers and fast food restaurants are being affected by the fight against obesity. Food manufacturers are seeing unhealthy ingredients negatively impact sales. Millennials and GenZers are shifting generational consumer behavior. And of course, the recent pandemic has disrupted every industry. Your biggest competition might not necessarily be a nimble company or a new app—it could be economic and societal shifts that impact the buying decisions of your customers.

Desirable

Just because you can offer a new product or service to your customers doesn’t mean you should: People need to be willing to pay for your differentiators.

Being different is not the same as being differentiated. What makes you distinct and different also must be desirable. Your customers must value what you offer. The name of the game is relevance in the minds of the buyers.

Disseminated

Finally, for something to truly be a differentiator, people need to know about it, both internally and externally. At the end of the day, although you can declare your differentiator, the market ultimately will determine the value of it with their wallets. When you ask customers “Why do you do business with us and not the competition?” they should be able to articulate the differentiator you are focused on. Therefore, it is critical that you share your differentiator externally. It is equally important that you share your differentiator internally, because it sets the direction for the company and serves as a compass, ensuring that everyone is solving the same problem—and a problem that is valuable to the organization.

Not all opportunities are equal. By focusing your organization’s investments on the area that will have yield the greatest results, you will increase the returns you get on your innovation efforts. Instead of innovating everywhere, only innovate where you differentiate.

Written by Stephen Shapiro.