While the economy is beginning to show signs of recovery, companies continue to face a brutal business environment. Competitors are cutting prices, simultaneously introducing new products and adding features to their existing product portfolio. What can you do in this highly competitive environment?

Essentially, you are faced with one of two fundamental strategies: become the low-price provider in your category or industry, which requires a cost structure lower than your competitors, or substantively differentiate your products from your competitors’.

Many firms try to accomplish the latter by creating additional products or upgrading their existing products with incremental features. For example, Kellogg’s Eggo waffles come in 16 flavors, and my local supermarket offers seven types of turkey breast. However, while the aforementioned companies are providing options, what meaningful value are these incremental product improvements really providing?

Additional products and upgrades are often competitively driven without any real understanding of how much additional value is being provided to the customer. Companies merely copycat their competitors without investigating what solutions their customers value.

This strategy of continually upgrading products, while seemingly a necessity to keep on a level playing field, provides little in the way of true differentiation.

The Consumer Electronics Association estimates that more devices have been launched from 1998 to 2003 than during the entire previous history of the industry. However, beyond a few core innovations, such as perhaps PDAs and digital cameras, what real value has been added? The path out of this reactive new product doodad strategy is to shift your perspective from being product driven to being customer-value driven.

A true differentiation needs to be somewhat sustainable and difficult to replicate. This is especially troublesome with physical products (versus service-related products), because the functions performed by your most-recent nifty product or feature is quickly copied. Research reflects that even the most sophisticated functionality provided by new products is replicated within three to six months.

Think of Proctor and Gamble spending all that money on developing the Swiffer only to have numerous competitors duplicate the functionality in a matter of months. While one might say that this is the inevitable nature of our competitive system, there are other approaches that will yield a more sustainable and difficult-to-replicate value proposition.

Specifically, delivering outstanding service to your customers will go a long way toward providing that advantage. Many of you are reading this and are thinking that you have heard this before. However, understanding a concept is a long way from implementing it.

The American Customer Satisfaction Index has consistently revealed that American business has not improved service delivery over the past decade. This finding clearly reflects that most companies, while understanding the value of service, are not delivering on this powerful means of differentiation.One company that not only understands the value of service but also delivers is GE—by many accounts the best managed company in the world. It is known for a wide range of products, including light bulbs, jet engines, medical imaging equipment, locomotives, consumer appliances, and turbines.

But GE is changing its strategic direction and is emphasizing service to such an extent that a component of its overall corporate vision states that it will be “a service company which also manufactures products.”

This direction is exemplified in the remote diagnostics service package that it sells with almost all of its engine-related products. A GE service center using satellite communication and sophisticated software will monitor a locomotive engine and, on the first sign of trouble, proactively take corrective action. That is real value!

Now, why is the supposedly best-managed company in the world making this transition to a service company? Service is a way to achieve sustainable differentiation and higher margins. Many organizations realize the importance of providing good service, but most don’t grasp that great service delivery requires a tenacious focus on execution.

Excellent service delivery is hard work and operationally exhausting. It requires explicitly defining what customers want, measuring how well you deliver on customer requirements and hiring the type of people who are suited to providing good service. Once in the door, you must train those people well, provide them with outstanding systems and processes and reward them for excellent performance. Certainly not as romantic as developing that new doodad for your existing product.

Technology, especially Internet-related hardware and software, was supposed to automate many aspects of service. In other words, we were going to automate service—get rid of all those hard-to-hire, -train and -manage customer service representatives.

This technological promise was made once before with call centers—telecommunication tools were going to deliver better service and reduce costs. However, our frustration is legendary with this supposedly better approach to customer service. A recent comprehensive Pew Charitable Trust study discovered that 94% of a randomly selected sample of 2,013 adults were “very frustrated” with call centers.

Technology is an enabler. It is not the solution to delivering great service.

Amazon.com is an example of a company that uses technology to support great service delivery. Amazon is the highest-rated company in the American Customer Satisfaction Index. It has invested millions in technology that helps them meet and exceed customers’ expectations. Its one-click ordering process is about as convenient as it gets. Its order confirmation and tracking services are easy to access and usable by even the most inexperienced computer user.

The key point is that Amazon uses technology as a tool to deliver great service—not as an end in itself. Without knowledge of the customers’ needs and the specific measures required to ensure that those needs are met, the technology would mean nothing.

A vast amount of research has gone into what the American consumer values in service, and the results have consistently revealed that we highly value two attributes: reliability and responsiveness.

Reliability means being dependable, accurate and honest—and delivering on your commitments. Responsiveness means being eager to help, offering an appropriate number of choices, and demonstrating both flexibility and simplicity in those out-of-the-ordinary circumstances.The Internet and related information technology can certainly help you become more reliable and responsive; however, technology also adds another layer of complexity. A great example of this is email. If your organization doesn’t have standards for getting back to customers, emails will often languish and sometimes go unanswered.

In early 2003, Jupiter Research investigated customer expectations for email response times and discovered that over 50% expected email to be returned within a 24-hour period, but only 54% of companies surveyed met those expectations. In addition, Jupiter discovered that 29% of businesses did not respond to email at all!

Clearly, these companies do not have a clear picture of what customers expect when it comes to providing reliable service. You must make a commitment to respond to your customers’ emails, faxes or phone calls within a timeframe they expect.

Responsiveness is the second core attribute of great service and should be a prime driver in all your service delivery processes, including your Web site. For example, shipping is a key consideration in online purchasing. How many sites do you know that provide a number of choices that meet your pricing requirements? Also, customers expect to use whatever communications medium is easiest for them. Is your company’s 1-800-number clearly identified on all your Web pages, or are you instead using your Web site to coerce a customer into unwanted self-service?

Another key element of responsiveness is an easy-to-use Web site. Online consumers expect to complete a purchase in three clicks. Can your site do this? Some 60% of potential customers drop away with each additional click in the online ordering process. It is imperative that you design a Web site with the customers’ service expectations in mind. You want customer loyalty, and providing great service is the prime determinant of Internet customer loyalty!

Creating sustainable differentiation is a daunting task, but providing great service does provide a business with a hard-to-replicate value proposition.

If you start with meeting customers’ needs for reliability and responsiveness, you are well on your way to providing a competitively superior level of customer value.