There are many ways companies compete with one another. Unfortunately, a lot of those ways seem like nothing more than an expensive route to commoditization.
Companies are relentless in their pursuit of finding their weaknesses. They hire consultants, create branding maps, and solicit customer feedback. In our hyper-competitive world, this feedback tells us what we're missing—our weaknesses.
Companies, like people, fall into the habit of thinking the way to be better is to become more like everyone else.
- Jane's company just introduced a new line of green worms? We need green worms too preferably caffeine enhanced green worms.
- Bob decided to offer a new service? We need a new service too!
- When you ask your customers what they want they respond with what you're missing.
- When consultants compare your products to others they tell you what the competition offers that you don't.
“A funny thing happens when you begin to capture competitive differences on paper”, says Harvard Professor Youngme Moon in her book Different: Escaping the Competitive Herd, “there is a natural inclination for folks in the competitive set to focus on eliminating differences rather than accentuating them.”
Our brains have been wired since birth to eliminate our differences.
We've all received school report cards. If you're like most people, at some point or another, you discovered you were below the class average in something. We all knew our parents would pick up on that weakness right away.
I cringed before coming home if I was even a hair below average in anything. After a mother saw that report card, it didn't matter how awesome you were in physics and math. The only thing that mattered was the fact that you were below average in art.
If your mother was like my mother, you wouldn't hear the end of it until you were once again average in art.
As adults, the only thing that has changed is who gives the report card.
Managers across the country hand out performance reviews that highlight your strengths and weaknesses. Of course, your boss wants you to address those weaknesses. He wants you to be more like everyone else. And since keeping your job is a pretty big incentive, you eagerly put your head down and do what you've done your whole life: rather than accentuate the differences you address your weaknesses and, in the process, become more average and indistinguishable from everyone else.
In the process, you move increasingly towards becoming a commodity.
It's like we're back in school all over; competitors and customers are telling us what we don't have—where we're below average. Only now this isn't grade school. The stakes are higher. It's winner take all and our competitive spirits take over. Except, increasingly, there is no winner.
Consumers can't tell company Y from Company X. Shelves in grocery stores are full of products that are all essentially the same. Companies think that the way to improve their laundry detergent is simply to add a new, previously unknown, fragrance. Being more of the same is, according to Moon, making brand loyalty harder to find.
Of course, if consumers pay close attention, these products have minute differences. But most of these differences are essentially meaningless.
Competing by eliminating our differences seems like nothing more than an expensive route to commoditization.
- When one airline introduced frequent flier miles the rest soon followed and the industry offerings were, once again, almost indistinguishable.
- When the Westin started offering the Heavenly Bed as a way to differentiate itself from the competition, almost immediately most other hotels at the same price point upgraded their mattresses too. The only problem was that room rates didn't increase to make up for the new investment. When everyone can offer essentially the same bed it becomes hard to differentiate yourself and raise prices in the process.
Ultimately, all of the advantages flow to the customers (and the mattress companies).
According to Moon, “The more generous the baseline value proposition becomes within the category, the easier it becomes for consumers to become indifferent and the more expensive it becomes for businesses to compete.” Investing in differentiation without the ability to increase prices or market share only reduces returns.
In the race to become more like everyone else, companies often don't think through the whole problem.
They “don't do the second step of the analysis which is to determine how much is going stay home and how much is just going to flow through to the customer,” says longtime investor Charlie Munger.
I've never seen a single projection incorporating that second step in my life. And I see them all the time. Rather, they always read: This capital outlay will save you so much money that it will pay for itself in three years. So you keep buying things that will pay for themselves in three years. And after 20 years of doing it, somehow you've earned a return of only about 4% per annum.
If this sounds vaguely familiar it should. It's a variation of the prisoners' dilemma; the best choice for all companies is not the best choice for each individual company.
I'm not saying that all competition based on product augmentation (either through new sub-categories or new features) is a flawed strategy. Under the right circumstances, some of these investments can, and will, pan out. I am saying that if your business is pursuing one of these strategies as a means of differentiating yourself from competition, you need to critically think through this strategy.
Read more in Youngme Moon's Book—Different: Escaping the Competitive Herd