Differentiation and Competitive Advantage
Amit KumarHow does one differentiate between the good and bad in this crowded IT services market? – This is a question which almost every services company asks and spends (or wasting!) millions of dollars on consultants and external agencies to find the right answers. Frankly speaking, so much has been said on this topic in various articles, blogs, talks etc. that I cannot pretend to give any special insights on this topic. However, I will try to discuss this in MindTree and more specifically in PES context, the unit where I belong to, and I will prove that the answer lies within the organization.
Generally, the Product Engineering Services business is a tough field to be in. It works on the lines that generally the OEMs and other product companies think of new product ideas, decide the characteristics and features, finalize the timelines and the budget, and then start scouting for partners to take up the part of the job. The services companies pitch in here to get their pie. These services companies compete on their capabilities, rates, prior records, delivery and quality standards. However, it eventually boils down to the employees’ profiles and companies play their card accordingly. As these profiles are generally sourced from the same market pool, all the services companies roughly end up with the same kind of people and none of them hold any competitive advantage. The result is that nobody is able to differentiate in this market and command any premium. How can this situation be changed?
If we go by standard management theories, organizations have three options to gain competitive advantage in a market – Cost Leadership, differentiation and focus strategy or a combination of them. Let’s discuss all these one by one and see which one fits best for MindTree PES business.
Cost leadership strategy is simply where you try to be the lowest producer of products and services and all attempts are made to undercut the competitors. We all understand that adopting this strategy at this stage of MindTree is not going to have the desired results due to the brand personality we have built over the last 12 years. MindTree has always been the “company with a difference” and trying to play the cost game might reduce our quality and dilute the brand image. Moreover, following this strategy is often a self destructive one. Companies often end up losing their market share and revenues if the strategy is adopted at a wrong time in their lifespan. The clear examples are airlines and telecom industries where service providers are struggling to adopt the low cost model because of their existing business practices which are not aligned to low cost leadership model. Exceptions are Indigo and Southwest Airlines which are doing fairly well due to clever adoption of this strategy at the right stage.
The second option – differentiation is the most abused word in both corridor talks and board room meetings. People talk about the need to differentiate without having any solutions on how to do it. It’s partially due to the fact that as all companies compete with the same talent pool, it’s not easy to differentiate. Customers see some differentiating value only when they see something very unique in a services company. It can be in the form of thought leadership, business insights, solutions, frameworks, etc. We often tend to confuse differentiation with some form of ready to show solutions, which is only partially correct. Anything which shows your understanding of the customer’s products and markets and can help them in generating extra revenues can be a differentiating point. Also your quality and delivery practices, IP protection policies, people management practices and composition of your work force can give companies an edge.
The last option – focus strategy is where you pick certain market segments and try to serve (and serve well!) those segments only. This is more suitable for start-ups and small businesses and might not be very useful when you are trying to expand, as MindTree is doing.
Now let’s try to apply all three of them in the MindTree context. Cost leadership is immediately ruled out. Although we always try to be cost competitive, yet to maintain our excellent delivery track record, we might not be the lowest producer at all occasions. Differentiation seems to be a good option but cannot be applied to all of the segments where MindTree operates. So the best option seems to be having a combination strategy of differentiation plus focus. We have to pick five areas, where we see potential for this decade, and try to build differentiators in these areas(we need to have a MindTree 2020 Vision). This is going to be a long term process and it might not be possible for just one or two persons to come up with the list of these five years and which differentiators to build in those areas. But I am pretty sure that enough intelligence lies in MindTree and if it is done through a collaborative process, we will find the answers and we have to. Thankfully, we have realized this and working hard in this direction.
Subroto Bagchi
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Raghav says:
Amit, good to see your blog. Now I can pull your leg on open forums – NICE!
Differentiation should not be on the basis of people, but delivery processes and ‘Brand’. Think about this – there are thousands of burger chains, yet there are new ones cropping up such as Five Guys. These chains are not only differentiated, but are gulping large chunks of market share as they expand rapidly. If burger chains can do it – so can services chains, and do it much better too. Next – there is no holy grail of differentiation. It comes down to being the best in chosen segments and putting energies behind it.
Surendranath says:
A good post at apropriate time, made me read more than once, on the lines and inbetween too.
Cost leadership is not a bad strategy afterall, as already sighted there are good examples like Southwest Airways, who were successful as well as have established a brand name due thier cost leadership unlike a misnomer of losing it. However cost leadership by undercutting is going to be a deathtrap. We can achieve cost leader ship in other ways like operational excellence, re-usable SAs and IPs etc., Here I remember a preface of a book written by my English professor which stated “Low cost doesn’t mean cheap quality”, he had priced it low for the benefit of students community, but people who used that book were more successful and scored high since it had a differentiation w.r.t mass answers of those who followed the most popular book.
On your second option of differentiation, I agree with you. Like a good food there are two parts to a differentiated solution, one being the solution and the second being the differentiation in the overall packaging and offering the solution, we need to look for creating differentiation in both these dimensions. There is a mention of the same folks in the market and hence no differentiation can be anticipated, which I am not fully convinced. We don’t need the gold medalists or doctorates to create a differentiated solution, we need people who look at the problem in a different angle and sees an unconventional solution. This week-end there was an appreciation from one of the leading semiconductor companies with whom we provide our services, appreciating an outstanding effort from one of engineers for a solution for which they were clueless and finding it time critical. The solution provider in this case is a C2 engineer who is pursuing his graduation.
The last option of focused strategy, what has been discussed need not necessarily be for the start-ups and niche domains, as we are trying to re-position ourselves from point services provider to solution provider, I think we are also a pseduo start-up and in certain areas we need to have focused cost or focused differentiation leadership to quickly gain a strong positioning. For e.g in HDMI space where we have IP we can be a cost leader, in some areas of testing where we have infrastructure and expertise we can be a cost leader as well as a differentiator. In customer relationship and KM we can be a focused differentiator.
On the concluding remarks, I too believe that we need to be adaptive by closely tracking the highly dynamic industry and market scenarios for the five forces model. We may need to be stragically and tactically change or correct our stance based on the situation. I find the mention of strategy for the next decade to be little longer on the time line (at least business level strategy) especially in the technology space we are in. More than the strategy formultaion, it needs a very agile strategy implementaton and evaluation which need to work at very quick response times.
As Amit says I too am confident and optimistic that we have the potential and we are going to make the difference