Differentiation as a Sales Strategy in a Mature Market

Executive Summary

Recent entries into the Japanese market by aggressive, low-cost competitors is requiring a retooling of the sales approach of existing vendors if they are to continue to grow over the long term. Both local and long time foreign vendors were once protected by certain barriers to entry: strong, trust-based client relationships, technical and quality leadership, and manufacturing and service delivery capacity. The new entrants have cleared these hurdles and are now a viable threat to sales due to their low cost value chain and pricing. Since it is impossible to win in a drawn-out price war, the key to success in a competitive sales situation is differentiation. The successful salesperson will seek to consult with the client to uncover needs that can only be satisfied by their company, thus making it difficult for the client to choose the low cost solution.

However, this seemingly obvious solution is complicated by the business culture of Japan. The buyer/seller relationship is a vertical hierarchy, with the buyer on top. To attempt to diagnose a client’s needs or business problems and offer a solution could be seen as a reversal of the natural order. Unless handled properly, both the salesperson and the client will strongly resist this. However, if the salesperson trusts that the process can work and is able to prove to the client that the benefits outweigh the costs, it can be very successful for both sides. A third difficulty would be getting high quality information that can be used to propose a sufficiently valued and differentiated offering. This can be complicated by two factors: access to and availability of information. In some cases, the salesperson will simply be denied access to certain information and in others, the necessary information may not even exist, for example; some companies do not have a clear mid–long term business strategy to align with. As with the previous issues, the cause lies partly in the cultural make-up of Japan. The solution in the first case is to leverage the greater access to information that the executive team has. In the second case, the answer is to work to build a business partnering relationship with the client in order to co-develop a mutually profitable strategic vision. Again, this is likely to require some executive level involvement.

Competitive Sales Strategies

In a vertical or niche market, when a low cost competitor (Cost Focus Strategy) enters, the only sales strategy[1] that can work over the long run is Differentiation Focus. This is because direct price competition with a low cost rival is not sustainable unless your company’s business strategy is also cost focus, since it would require a restructuring of the company’s whole value chain all the way from research and development through to service delivery and support. In other words, your organizational structure must be at least as cost efficient as the competition’s. Even if this were the case, the result would be price wars and decreasing margins.

A differentiation strategy is appropriate where the market is extremely competitive or saturated with many alternatives, customers have very specific needs that are possibly under-served, and the firm has unique resources and capabilities that enable it to satisfy these needs in ways that are difficult to copy.

 

How to Implement

Customers with high purchasing power and low switching costs (Switching costs means how easy or difficult it is for the customer to change suppliers.) in a competitive and mature market usually attempt to force vendors to compete against each other on price thus driving profit margins down to zero. This is done by the customer issuing RFPs to several technically competent vendors, receiving proposals with identical specifications, and then choosing the lowest priced proposal. In a growth market, this is not a problem since only a very few companies have the technical and scale capabilities to clear the first hurdle and the amount of business opportunities is big enough for everyone to profit. However, in a mature market with many technically competent competitors, this makes it very difficult for all but the most cost efficient companies to survive.

Differentiation in Action

Rather than simply responding to RFPs with client prescribed proposals, which places them in an unwinnable price competition, a company with differentiation as their competitive strategy needs to add value to their offerings in a way that produces competitive advantage against their low cost competitors.

This can be accomplished in several ways: through bundling products and services, to create a total package that is unique and cannot be duplicated by the competition, through offering a specific and valuable technical capability that the competition does not (yet) have, or through “loss leaders” which tie the customer to service or technology with high switching costs. (e.g. Canon personal printers are sold at or below cost, committing customers to purchasing ink cartridges for the life of the machine.)

The problem with the differentiation strategy is that it requires sidestepping the usual RFP/proposal procedure. In other words, the salespersons would need to use the RFP as a starting point from which to begin a consultative diagnosis of the client’s business needs (not only technical needs) in an attempt to uncover opportunities for differentiation through bundling, or unique technical capabilities or by identifying other value drivers that could influence the customer. Even identifying an attractive loss leader with which to force a commitment requires greater than normal knowledge of the client’s business.

 

Consultation

The only really reliable way to differentiate a product or service from a competitors’ is to thoroughly investigate the client’s needs until you can uncover high value needs that you can satisfy, and your competitors cannot. This means taking the time to diagnose before prescribing solutions.

This idea of diagnosis before prescription is actually quite unusual in sales. Even quite experienced sales people will immediately begin telling the client about new features of their product and the benefits those features can bring. The problem with this approach is that everyone does it, and so the client cannot make choices between sellers except based on price.

Consultation can produce other benefits also: where a strong client/vendor relationship exists, there may be little threat from competition. However, sales will remain flat unless the seller finds ways to grow existing sales channels or to offer solutions to opportunities they would not normally attack. Both of these ways of growing sales requires consultation to uncover new opportunities within existing channels as well as to find ways to modify client requests to suit the seller’s product portfolio.

However, from a cultural standpoint, this consultative approach can be very difficult for a number of reasons.

Buy/Seller Relationship

Compared to other countries, the relationship between buyer and seller in Japan is very hierarchical and vertical. “Buyers generally get most of what they ask for. Sellers, however, expect Buyers to take care of them”[2] Therefore, for the sales person to be successful, it means that they must always carefully show respect and to never suggest that the customer has problems that need to be solved. They must simply respond to customer requests with “yes we can do that” and when the customer asks for a presentation of their proposal, to propose based strictly on the customer supplied RFP.

And so the experienced Japanese salesperson is unlikely to attempt this sort of diagnosis. “While it’s quite acceptable in the West for sellers to ask buyers about problems, this isn’t so easy in the Japanese culture. There’s always the risk of being insulting or offensive if you suggest that your customer – a person of status – has problems.”

On top of that, the customer himself may hesitate to allow this sort of diagnosis, for the same reasons mentioned above and also as a way to avoid risky or uncertain situations. Most employees in Japanese companies have a reasonable expectation of lifetime employment with regular promotions and salary increases. The only thing that can threaten this is if they make a mistake. So workers are very hesitant to try anything new or to take risks with established procedure: allowing a salesperson to spend time investigating their company needs and proposing creative solutions may seem too dangerous for the average employee.

The third difficulty is the ability to get the necessary information, once one has permission to search for it. Because of the hierarchical nature of most Japanese organizations and the inability to communicate with persons above one’s own level, the average salesperson cannot even speak to decision makers or executives who might be able to explain the strategic vision of their company. This makes it difficult to uncover strategic business drivers to link proposals to. One of the reasons for this could be the strong communitarian/collectivist tendency in Japan: salespeople from other companies are perceived as outsiders, with no access to inside information and decisions are made by teams with lower level delegates as the contact persons or gatekeepers. And not only that, according to Michael Porter[3], many Japanese companies tend to be more reactive to external stimuli, rather than being driven by a clear internal vision, so many companies may have no identifiable vision anyway, rather their purchasing decisions would be made in response to competitive pressures or environmental, economic and regulatory changes. All of this makes it extremely difficult to find the means to propose a differentiated solution to a customer request/need.

Recommendations

The sales team needs to believe that service to the customer is more than simply taking orders, that they have technical know-how and business acumen that can be beneficial to the customer, and that they are doing a disservice by withholding their contributions. This way, they can maintain the culturally appropriate vertical relationship with the client, while obtaining access to the information they need. Also, they may need clear statistical evidence that this consultative approach will not lose sales, but rather should increase sales, when used properly. In fact, Fuji-Xerox Japan saw a 74% increase in sales when their team used this type of consultative selling approach[4]. So one recommendation would be tracking the team’s sales successes, compared against a control group that does not use the consultative approach. Once there is a clear pattern of success, the process should gather traction with the rest of the organization.

It is a fact that; “Japanese professionals tended to avoid making mistakes at all costs in order to protect their career growth.”[5] Therefore, the client side contact needs to be shown specific evidence that the consultative approach will produce better results for their company and not increase their personal risk level. To accomplish this, we would recommend using a recent “success story” to illustrate how the consultative/diagnostic sales approach produces better value solutions for the client organization and involves no risk to the reputation of the contact person.

Since many Japanese companies are reactive to their business environment, the sales person needs to become aware of all the external stimuli that are combining to create the client’s evolving strategic vision. He/she can then demonstrate this awareness along with reasonable mid-long term business solutions linked to technical capabilities. And since access to decision makers is limited, the sales team must also leverage the abilities of their own executives to uncover the client’s emerging vision and propose strategic solutions to the appropriate level in the client organization.

So, with careful attention to respecting the cultural needs of the customer, it is possible to change the sales approach to one which will produce better results for both the client organization and the seller.

About the Author: Mark Beresford is Principal and Senior Consultant at Globalinx CORP. Tokyo.


[1] Michael Porter, What is Strategy? (Boston, Harvard Business Review, 1996), 64.

[2] Nancy Adler, International Dimensions of Organizational Behavior (South Western, 2002), 216.

[3] Michael Porter, What is Strategy? (Boston, Harvard Business Review, 1996), 63.

[4] Neil Rackham, SPIN Selling (Surrey, UK: Gower Publishing, 1995), 70.

[5] John P. Miliken, Dean Fu, Koichi Tamura, The Global Leadership of Carlos Ghosn at Nissan (Thunderbird, 2003), 3.

Consumption Chain Analysis

How to Find Differentiators

Background

Offering customers something of value that competitors cannot or do not provide is the essence of differentiation. The problem is that most companies (and most sales people) focus all their energy and attention only on their products and services or their price. We often hear sales people complaining that their company’s product portfolio is no different that their competitors and that their prices are just not aggressive enough to beat the competition.

But changing the product portfolio or dropping the price (while it may make things easy for the sales person in the short run) is actually the most expensive and slowest form of differentiation. In fact, a company has the opportunity to differentiate itself at every point when it comes into contact with its customers—from the moment potential customers realize that they need a product or service to the time when they no longer want it and decide to dispose/upgrade/replace it. This relationship life-cycle is known as the consumption chain.

When a company thinks creatively about their customer’s entire experience with a product or service, they can discover opportunities to both position and sell their offerings in ways that they, and their competition, would never have thought possible.[1]

Objectives

  1. To facilitate a mindset shift from product/service/price differentiation to consumption chain differentiation,
  2. To inform sales people how to search for critical value drivers when speaking to their clients,
  3. To provide a practical vision for how to successfully implement the consultative method of selling in reality, when the sales person is facing the customer.

Method

There is often some doubt that it is actually possible to differentiate against the competition using the products and resources at hand. If one can work together to create a clear and practical vision of how to differentiate against competitors, it will become much easier for the sales team to adopt and use the consultative sales methods successfully and therefore exceed their own sales targets and contribute to long-term growth.

We have found it very effective to hold a series of focus groups with small sales teams, with similar customer profiles, to analyze the entire customer life-cycle and find all the potential sources of value in the consumption chain.

The information gathered and compiled in this focus group would then be shared with the whole sales team as a way of informing them how to search for critical value drivers when speaking to their clients. This would enable the sales team to ask the questions necessary to demonstrate unique value that already exists in the organization’s total offering package. (As a definition of offering we are using: “the total package of benefits the customer receives when he or she buys.”[2])

More importantly, this information will help to provide a clear vision for how to use the consultative method of selling in reality, in front of the customer.

Activities

Of course the process we use varies slightly from company to company and from sales unit to sales unit. But basically the process follows these steps outlined below:

1.Map the consumption chain

·Starting from need recognition all the way through to disposal/upgrade/replacement of the product

2.Analyze the customer’s experience

·At each link along the chain what is the customer doing; how are they interacting with you, your product, etc.

3.Identify differences

·What does our company do?

·What does our company not do?

·How does the competition do it differently?

·What are our strengths?

·What are their weaknesses?

4.Build value propositions (for each link in the chain)

·What value does our way add?

·What costs does our way reduce?

Expected Outcomes

What we have achieved by facilitating this discussion at various companies in different industries:

  • A clear picture of the total customer experience over the entire product life-cycle
  • A recognition and consensus of what the customer values highly (and also what they do not care about)
  • A list of our points of differentiation against their competitors
  • A concrete value proposition for each point of differentiation
  • A clear picture of where the customer experience could be improved

 

1) Mapping the Consumption Chain

Below is an example of a generic consumption chain. This procedure can be applied to any industry, product or service and can be profitably applied to product design, marketing, and sales. It is particularly useful for salespeople operating in a mature market where products and services appear quite similar.

By mapping the consumption chain, the sales (or marketing or product development) person is encouraged to consider the entire customer experience with the organization that delivers the product or service. Each of the links in the chain has activities and attributes that can create cost or generate benefits for customers and therefore need to be considered when customers make a purchasing decision. Total life cycle costs must be deducted from the total benefits delivered by the product or service to calculate a measure of total delivered value.

As sales people, we can reduce the downward price pressure usually applied by customers who only look at product acquisition cost, by helping them to calculate this total life-cycle value.

2) Analyze the Customer’s Experience

This helps us to see what the customer values at each stage along the consumption chain. Basically, what we want to learn is what they like about what the company does and how much it is worth to them. To do this we need to think about how the customer interacts with our Product, People, Processes and Past.

  • Product: The features and benefits of the product. This is the baseline of differentiation. To be competitive, the features and benefits of a product have to convey valuable differences to buyers. When there are no or minimal differences, the other Ps in the 4Ps model must be used to differentiate the product or service.
  • People: The individual or team working with the client represents another part of the total offering. As a product, the individual or team literally has features and benefits. The level of expertise, ability to get things done, experience with similar clients, and even industry status represent examples of potential features of individuals that can help reduce uncertainty and facilitate buying.
  • Process: How the organization does business is a strong potential area for differentiation. If the actual buying, delivery and implementation process is efficient and user friendly, it can be a major differentiator. Careful definition of this process, especially for intangible services, can bring a sense of security to an uncertain buyer.
  • Past: Another resource is the combined experience of the organization with the type of issues the buyer is facing.

Questions: Below is a short list of questions that could be used to uncover value at the various stages (links) along the consumption chain:

Awareness of need

  • How do customers become aware of their need for our product/service?
  • What kind of future proofing do we provide to the customer?
  • Do we make customers aware of their needs in a new or unique way, or proactively rather than reactively?

Search and learn

  • How does the customer find out about our products or services?
  • How do we make our customer’s learning process more convenient and less expensive?

Solution Design

  • How is the technical solution designed?
  • Who is consulted during this process?
  • What resources or information are used?

Selection

  • How do we make the customer decision making process more convenient and more comfortable than competitors’?
  • How do customers select among competing vendors?
  • What are their priorities?

Financing

  • How easy is it to arrange financing?
  • What is done to reduce the financing costs?

Delivery

  • How is our product delivered?
  • How quickly or carefully is it delivered?
  • What is the customer perception of the delivery method?

Installation/construction

  • How is our product installed?
  • Who does the installation or construction?

Relocation

  • How is our product moved around?
  • How do we make it easier to do this?

Use

  • What are customers really using the product for?
  • What fundamental need are they addressing with the product?
  • How do we work to help them minimize their operating costs?

Support

  • What do customers need help with when they use our product?
  • How do we help them?

Complaint Handling

  • How does the company handle complaints?
  • How does the company work to prevent future complaints?

Replacements

  • Does the customer need uninterrupted service?
  • How do we support this?

Service

  • How cheap or convenient is it?
  • How fast is it?

Disposal

  • How do we assist in the disposal/recycling of the obsolete product?

Upgrade

  • How easy is it to upgrade an existing product to a newer version?
  • How do we minimize costs and maximize the lifespan?

Product Development

  • What efforts are made to predict the customer future demands and to plan for them?

3) Identify Differences

Next, we will want to assess the results to identify realistic and valuable differentiators. To do this we need to know exactly how we do things differently than our competitors. Then we can use the Attribute Map to objectively evaluate how we are performing against the competition in the eyes of the customer.

Table 1: Attribute Map[3]

4) Build Value Proposition

What we want to learn at this stage is what is the actual value of the differences. These could be between how we do things and how our competitors do them or between the quality of our people and the competitors’ people, or between our experience and our competitors’, etc.

  • What value does our way add?
  • What costs does our way reduce?
  • What risks does our way eliminate?
  • How much is this all worth?

Results

We have found this to be an excellent way of facilitating the shift from traditional (features and benefits) selling to a more consultative approach, with an aim to finding ways to differentiate against competitors even in very mature and highly competitive markets.

One thing to bear in mind though is that competitors catch up very quickly these days, so this kind of awareness building is best done on an ongoing basis and the information fed back to product development and marketing to maintain or build competitive lead.

About the Author: Mark Beresford is Principal and Senior Consultant at Globalinx CORP. Tokyo.


[1] MacMillan and McGrath, HBR on Innovation, 2001, p. 132

[2] Theodore Levitt, Marketing Success Through Differentiation—of Anything, HBR, Jan-Feb, 1980, p. 3.

[3] MacMillan and McGrath, “Discover Your Products’ Hidden Potential”, HBR, 1997

Globalinx Corp