Differentiation is the essence of strategy, the prime source of competitive advantage,” write Bain and Company consultants Chris Zook and James Allen. But, as Harvard’s Joan Magretta explains, many managers appear to believe otherwise, “Nothing is more absurd—and yet more widespread—than the belief that somehow you can do exactly what everyone else is doing and yet end up with superior results.”

If differentiation is the key cause of competitive advantage, then it’s important to understand what it is and how to create, communicate and implement it. I’ll focus on the first issue in this post and leave it to later posts to elaborate on the remaining matters.

Defining Differentiation

One way of defining differentiation is to say that an offering is differentiated when customers perceive that it differs from its competition on any physical or nonphysical attribute. That’s a mouthful, so let’s chop it into the bite-sized pieces I’ve italicized.

Offering: “Offering” is an umbrella term that includes products, services, brands, companies, and even individual people. Managers typically think of differentiation as something that applies to products, but the reality is that any sort of offering can be differentiated from competing offerings.

Customer Perception: Differentiation doesn’t exist until the customer perceives that it exists.

Consider, for example, two nonprofit organizations that provide the same service to the same constituency and achieve the same level of performance with respect to the constituency. If one of the organizations markets itself to funders in a way that convinces the funder that the organization is in some way superior, then differentiation can be said to exist in the mind of the funder, regardless of the fact that the performance of the organizations is identical.

Now consider a second example where there are meaningful differences in the performance of two nonprofit organizations, but the funder fails to perceive them. In this case, there is no differentiation in the mind of the funder, despite the fact that one of the organizations outperforms the other.

As these examples illustrate, differentiation is a state of mind. It doesn’t exist until the customer perceives that it does.

Physical and Non-Physical Attributes: Managers usually think of differentiation in terms of the differences in the physical attributes of two products. For example, suite guestrooms in a hotel are physically different than traditional guestrooms in terms of size, furnishings, and other physical attributes.

But offerings can also be differentiated on the basis of non-physical attributes. For example, Best Western’s 2011 advertising campaign employed a “family” theme—the fact that the hotels are family owned and operated—to set itself apart from competing brands that are, by implication, more “corporate.” Being “family owned and operated” is a non-physical attribute of a hotel.

The Difference That Makes a Difference

An additional issue—one that is not contained in our definition of differentiation—is the idea of a “difference that makes a difference.” It is not enough for an offering to be different. To persuade a customer to buy one offering rather than another, the offering must be different in a way that matters to the customer. The offering must provide a physical or non-physical attribute that competing offerings do not and the attribute must provide a benefit that is important enough to the customer to sway his or her purchase decision. In short, the difference must make a difference.

By way of example, consider again two hotels that differ in terms of the type of guestrooms they offer—all-suites vs. traditional. A couple that is traveling with their children is very likely to prefer the all-suite hotel because it offers the twin benefits of being less expensive than two traditional guestrooms and enabling the couple to keep an eye on their children at night. The suite’s extra space is a difference that makes a difference to the couple. In contrast, the extra space might not make a difference to a guest who is traveling alone.

Making Differentiation Happen

Creating a good differentiating idea—one that causes droves of customers to buy your offering instead your competitor’s—isn’t easy. We’ll talk about how to do it in a future post. For now, suffice it to say that it requires equal doses of creativity and analysis. And once you’ve created the differentiating idea you need to develop a system for implementing it. You also need a marketing program that will make people perceive the difference. We’ll talk about the latter two matters in future posts, as well.

For now, it’s worth taking a moment to fully appreciate what Zook, Allen, and Magretta had to say at the start of this column. Differentiation is the prime source of competitive advantage. You aren’t going to achieve superior results by doing what everyone else is doing. If you want to get a leg up on your competitors—or prevent them from getting a leg up on you—you need to get serious about developing a difference that makes a difference.