There are three sources of differentiation for any business: selling at the lowest cost, leading the market in product innovation, or becoming an integrator and customizer. The third strategy is the most widely applicable to most businesses.
The lowest cost/lowest price strategy is open to only one firm in an industry at any given time. In my view, you must constantly pursue lower cost, just to stay in the game. But to be the winner, you need a new business model - a different approach from that of your competitors (e.g., Wal Mart's supply chain excellence). Mature firms are often stuck with legacy costs that will make it impossible to achieve "lowest cost" position.
Product innovation leadership can be open to more than one firm in an industry. Success at this strategy requires a world class development process and adequate investment. To succeed as well as companies like Apple and 3M, innovation must be built into the DNA of the organization - not just an add-on. This is a tough strategy, with a fairly long payback period.
Integration and customization is about profitably delivering tailored offerings to individual customers or customer segments. Growing out of intense understanding of a few key customers, these offerings look beyond product in order to improve the customer's experience with ordering, using and disposing of your product. This is a strategy I believe most firms can employ. By learning what really makes a difference to a small segment, and taking action to deliver in those areas, a diligent firm can fairly quickly differentiate itself from the competition. The book that I use to guide an organization down this differentiation path is Mike Lanning's Delivering Profitable Value : A Revolutionary Framework to Accelerate Growth, Generate Wealth, and Rediscover the Heart of Business
