The alternative to low cost is differentiation. In a successful differentiation strategy, the company offers products or services that are perceived to be distinctively more valuable to customers than are competitive offerings, and is able to do so with approximately the same cost structure that competitors use. In this case, companies A, B, and C produce widgets and all do so for $60 per widget. But while customers are willing to pay $100 for widgets from company A or B, they are willing to pay $115 for company C’s widgets, because of a perception of greater quality or more-interesting designs. Here, company C has a $15 higher margin than its competitors and a substantial advantage over them. In this type of strategy, different offerings have different consumer value equations and different prices associated with them. Each brand or product offers a specific value proposition that appeals to a specific group of customers. Loyalty emerges where there is a match between what the brand distinctively offers and the consumer personally values.

All successful strategies take one of these two approaches, cost leadership or differentiation. Both cost leadership and differentiation can provide to the company a greater margin between revenue and costs than competitors can match—thus producing a sustainable winning advantage (figure 4-1). This is ultimately the goal of any strategy.

Both cost leadership and differentiation require the pursuit of distinctiveness. You don’t get to be a cost leader by producing your product or service exactly as your competitors do, and you don’t get to be a differentiator by trying to produce a product or service

identical to your competitors’. To succeed in the long run, you must make thoughtful, creative decisions about how to win. In doing so, you enable your organization to sustainably provide a better value equation for consumers than competitors do and create competitive advantage.

At a high level, the choice is whether to be the low-cost player or a differentiator. But the how of each strategy will differ by context. Cost leaders can create advantage at many different points—sourcing, design, production, distribution, and so on. Differentiators can create a strong price premium on brand, on quality, on a particular kind of service, and so forth. Remember that there is no one single how-to-win choice for all companies. Even in a single market, it is possible to compete in many different ways and succeed. Choosing a how-to-win approach is a matter of thinking both broadly and deeply, in the context of the playing fields available to the company.

Armed with a map of the playing field and an analysis of the structural attractiveness of the individual segments, the strategist can move to the second major category in this framework: an analysis of customer value. Regardless of whether a firm wishes to be a cost leader or a differentiator, it needs to understand precisely what customers (its own and its competitors’ customers) value. This means understanding underlying needs, like recognizing, with Gain, that a sizable group of consumers cared deeply about the sensory experience of doing laundry, valuing the scent of the detergent in the box, in the wash, and in the drawer or closet. Only once this need was understood was it possible to position and differentiate Gain along this dimension.