Enhancing Competitive Differentiation -- Page 1

Becoming noticeably and positively different from your competition has always been a very tough job. Many kinds of differences, if successful in attracting customers, can be easily duplicated by your competitors. To achieve lasting differentiation, your business must be unique in ways that competitors cannot easily copy or at least are unlikely to choose to copy.

Product and service innovation is the traditional route to differentiation. Development lead times, along with patent protection, makes duplication a lengthy and costly process. Innovations that cannot be protected by patents may have some period of protection in development lead times but, if neither of these are available, innovation produces only brief advantages. The fashion industry is an example of how brief design and style innovation advantages can be. Intel is at the opposite extreme, with its designs heavily fortified by patents, huge production facility costs, and lengthy development lead times.

¥ Wal-Mart competes with great success on service and price advantages. Service comes from a strong culture built up over decades. Price advantages come from a very lean cost structure and huge buying economies resulting from major systems investments over a similar period.

¥ Dell Computer also competes on price, performance and service. Its innovative production system that builds to booked orders is almost unique and very difficult to duplicate. Dell maintains a position among computer performance leaders by careful design. Service is what brings its domination in the corporate and small business markets.

Banks have a much more difficult challenge in trying to stand out from the crowd. Customer surveys year after year rate most banks the same, despite huge efforts and expenditures to develop some degree of advantage in the marketplace. Most of this money and effort is wasted, except to the extent that it keeps each bank from falling behind its competition.

The result is that banks compete chiefly on price and advertising, requiring ever increasing investment in technology to drive costs low enough to maintain profitability. Heavy ad spending trumpets low prices and attracts price-sensitive customers. This strategy, most often adopted by large banks, has some serious weak points that can be exploited. One of the most important weak points is in the area of customer relationships.

Banks that attract customers with low prices and heavy advertising rarely devote much attention to customer relationships. Their customer base is increasingly dominated by customers who chase price in the absence of any other value being offered by banks in their marketplace. The typical large bank has very poor customer service, or handles customers according to current profitability (a serious mistake, as we point out in our pages on Profitability Analysis & Customer Relationship Strategy), both of which lead to dissatisfied customers and a non-relationship.

Building and nurturing customer relationships is perhaps the most effective way to create a strong and sustainable competitive difference in banking today.

A strong customer relationship takes a lot of time and effort to build but, once built, it is protected by customer loyalty to a truly good and trusted service provider. Such customers will be very hard to take away.

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