The most liberating, yet most difficult, aspect of strategy development is choosing your key area of differentiation. When asked, “What kind of business do you want to be? Do you want to have the best products, best service or lowest prices?” many CEOs simply say “Yes, we want to be all of those things.”

This response is unrealistic and misguided. It’s hard enough to be truly world-class and market-leading on one of these aspects of strategy, never mind all of them.

Based on the work of Michael Treacy and Fred Wiersma (in their book, The Discipline of Market Leaders), there are four generic types of strategy that companies can pursue:

1. Best Product (or Service). These companies want to have the latest and best products for their target customers. New product development is critical to their success, and customers are willing to pay more to get the value they’re after. Examples include Apple, Sony, Singapore Airlines, Ferrari.
2. Lowest Price. These companies offer amazing prices to their customers who believe that the product quality is good enough given the price available. Examples include Ryanair, Tata Cars, Aldi, Primark.
3. Most Convenient. These companies offer a clear standard of performance and deliver against it every time. They are highly dependable, highly convenient and hassle-free. Examples include McDonalds, Toyota, Dell, Amazon.
4. Most Customised. These businesses tailor their offer to individual customers, creating expert, bespoke solutions. Close relationships with their customers are critical to their success. Examples include McKinsey, NetJets, Nordstroms.

Which organisations can you name that lead on three or four these dimensions? If you can name one or two, congratulations, but these exceptions simply prove the rule.

Most of the world’s top organisations make clear choices about where and how they wish to differentiate themselves. A major reason they do this is that different strategies demand different types of organisation.

While, for example, a Best Product company, such as Apple or BMW, will emphasise new product development and have many cross-functional project teams working on bringing new ideas to market, a Lowest Price business, such as Aldi or Ryanair, will have very simple, centralised processes, and will strictly control costs in all areas of the organisation.

So which strategy should your business be pursuing? The answer is likely to be found by understanding where your organisation’s capabilities, the key needs of your market, and your passions meet.

After all, without a sense of excitement, mission and anticipation, it’s unlikely that you’ll deliver a strategy of any value whatsoever.

© Stuart Cross 2009. All rights are reserved.

In the 15 seasons between August 1994 and May 2009, Manchester United played 286 home games in the Premier League. Of those matches, United won 212 and lost only 23. Visiting sides had, on average, an 8% chance of coming away from Old Trafford with three points, and a 75% probability of leaving with nothing but a poorer goal difference.

Not only did the away teams have United’s great players to deal with, but also crowds of up to 70,000 people or more, and match officials who may (or may not) have been intimidated by these fans, let alone United’s manager, Sir Alex Ferguson, and his infamous stopwatch!

Few managers, planning their seasonal campaigns, look forward to the visit to United with any kind of optimism.

And yet, many businesses operate in markets that are the equivalent of playing away at Old Trafford every week. Trying to imitate the market leader, they effectively end up playing to another company’s rules, on another company’s pitch, with another company’s ball.

Take the European airline market, for example. During the 1980s and into the 1990s, national carriers, offering similar levels of service, dominated the market. Second-level players found it nearly impossible to build a profitable business by tackling these carriers, many of them receiving government subsidies, head on. British Midland, for example, struggled to deliver a profit margin of more than 1-3% during this period.

Instead, it took Ryanair, followed by EasyJet and others to revolutionise the market by offering no-frills, low-fare air travel to the millions of customers who had previously been priced out of the market. Ryanair had struggled for some years to match British Airways and Aer Lingus on routes between the UK and Ireland, and so it took a different route to growth.

There are ways you can tilt the odds in your favour, and to start to play on your pitch, with your ball and to your rules.

1. Identify where there are potentially valuable unmet customer needs in and around your markets. Michael O’Leary, Ryanair’s CEO, realised that there were millions of people who wanted to travel, but simply couldn’t afford to.
2. Determine which of these unmet needs your business has the passion and capability to meet. O’Leary had the passion to make the change, but had to develop the airline’s capabilities to deliver reliable, low-cost air travel over a period of time.
3. Begin to prototype, test and, if successful, roll out your new offer. Ryanair started to offer low-cost flights into regional airports, rather than the capital cities favoured by the full-service carriers. Within 5 years passenger numbers had risen from less than 1 million to over 2.5 million.
4. As you succeed, build barriers to new entrants. O’Leary exploited the airline’s burgeoning success by operating solely Boeing 737’s (minimising maintenance costs), using smaller, quieter airports (cheaper and quicker to turn around), and using PR to create a brand of a maverick airline championing low fares.
5. Drive further innovations that underpin your position as the owner of this area of the market. Since 2000 Ryanair has launched on-line booking, launched more routes, bought rival airline Buzz at a significant discount, and further added to its low-cost, no-frills position by eliminating airport check-ins and adding ancillary charges for services such as carrying baggage in the hold and early access to the plane’s seats. It has even talked about offering standing areas on its planes.

Not all customers like Ryanair’s offer or its attitude. But it continues to play to its own rules. Its strategy has helped it become Europe’s largest and most profitable airline, and over the past decade or more, it is the national carriers who have been forced to play on its pitch.