Differentiation is the act of designing a set of meaningful differences to distinguish the company’s offerings.
It is concerned with product differentiation as well as service differentiation. Differentiation strategy achieves a competitive advantage by creating a product (good or service) that customers perceive to be unique in some important way.
Differentiation safeguards a company against competitors to the degree that customers develop brand loyalty for its products. Brand loyalty is a very valuable asset because it protects the company on all fronts.
A product with differentiated features can command premium prices (prices above the industry average). Customers usually pay premium prices because they value the differentiated features of the product.
Thus, the company that adopts a differentiation strategy can increase profits by charging higher prices and is able to outperform its competitors.
Definition of Differentiation Strategy
Differentiation strategy is concerned with product differentiation. It refers to making a company’s product different from the similar products of the competitors.
Although there can be differentiation in services’ too, in this book, we would use the word ‘differentiation’ mainly to mean differentiation of tangible products.
As a marketing terminology, differentiation means making a product’ different from the similar products of the competitors.
According to Philip Kotler, differentiation is the act of designing a set of meaningful differences to distinguish the company’s offerings (i.e., products) from competitors’ offerings.
A differentiated product is unique by itself. A product can be differentiated based on its form, shape, quality, durability, reliability, repairability, style, design, or some other features of the product.
A product will become differentiated from that of the competitors if its form (size, shape, or physical structure) is changed.
For example, Tanin (manufacturer of plastic products) can differentiate its round-shaped plastic tea table by changing its shape to a square- size or oval shape. ‘Red Leaf marker pen may be differentiated by making it transparent.
Features of a product (such as the exterior finish of a car, fragrance of perfume powder or color of toothpaste) can be the themes for product differentiation.
Performance quality (low, average, high, or superior quality in terms of using the product for a particular purpose) can be used as the basis of product differentiation. A company may set its products at a high-quality range and gradually switch down to average or low quality or switch up to superior quality.
However, each of these has merits and demerits. Conformance quality is another theme of product differentiation when all the produced units are identical and meet the specifications of the product.
The goal of the Differentiation Strategy
A differentiation strategy aims to achieve a. competitive advantage by offering a unique product to customers. When a product becomes unique due to differentiation, it becomes attractive to customers.
However, the product’s differences must be valuable to customers. A product with differentiated features can command premium prices (prices above the industry average).
Customers are usually to pay premium prices because they value 1he differentiated product features. Thus, the company that adopts a differentiation strategy can increase profits by charging higher prices and can’ outperform its competitors.
Ways to Achieve Differentiation Advantage
There are several ways to differentiate a product or service, and these provide ways to achieve uniqueness. Among many of the themes, the company can focus on the following issues :
Differences in Quality
These days’ customers are more aware than before, and this brought an emphasis on quality issues. Companies are largely emphasizing quality as a strong differentiation tool. Differentiation based on quality gives companies a special image that ensures sustained competitive advantage
Product Reliability
By ensuring the reliability of a product or service, a firm can achieve differentiation. For example, US airlines publish monthly features for on-time departures and arrivals because customers highly value departing and arriving when they expect to.
Innovation
Another important source of competitive advantage is innovation. For highly technologically complex products, innovation is an important source of differentiation. Sony has proved itself in the market as a designer and manufacturer of high-quality products. They made it possible through continuous redesign and innovation.
Responsiveness to Customers
Customers are the keys to the success of any organization. A company may differentiate a product based on responsiveness to customers. When this becomes the basis for differentiation, the company offers comprehensive after-sales services, including repair. This sort of differentiation is highly workable in the case of products that require frequent after-sales services, such as microwave ovens, television sets, computers, cars, and the like.
Responding to Customers’ Phycological Demands
Responding to customers’ psychological demands is an important source of product differentiation. Because there is a group for whom special prestige products are important. This is especially important in the case of luxury or fashion goods and specialty products.
Distribution Channels
Organizations can also differentiate their products by using exclusive distribution channels. “Certain women’s clothing designers are only available through a shop of the designer’s name. An expectation is created that clothing in these shops has particular characteristics that cannot be easily copied.
Types of Differentiation Strategy
There are two types of differentiation strategy. They are;
- Broad Differentiation Strategy,
- and Focused Differentiation Strategy.
A “broad differentiation strategy” is adopted by a company to be ‘unique to a wide range of customers. In this case, a large number of customers is the focus, and those customers consider the differentiation valuable to them.
For example, a cement company is offering its product to a broad market with a brand name.
On the other hand, a differentiation strategy is called a focused differentiation study when the company divides its market into several small segments (niche) and then offers a product design for each market second segment.
For example, it follows a focused differentiation strategy in that it offers normally bolted cola, canned cola, and diet cola for differentiation of different segments.
7 Ways to Differentiate Your Business from the Competition / How Organizations Can Achieve Product Differentiation
There are various types of differentiation themes. These themes provide ways to achieve differentiation. A company can pursue differentiation based on these themes.
Hill and Jones suggested several ways to achieve differentiation in a company’s products.
- Differences in quality.
- Innovation.
- Responsiveness to customers.
- Responding to customers’ psychological desires.
- Wide choice of customers.
- Reliability of products.
- Availability of spare parts/peripherals/accessories.
Differences in quality
A company may differentiate its product simply by increasing quality and reliability.
Innovation
For highly technologically complex products, innovation is an important source of differentiation. Computers, stereos, television sets, and refrigerators require differentiation based on new innovative features.
Nokia and Samsung continuously differentiate their mobile sets through innovation – changing its features.
When innovation is the basis for differentiation, a firm may include multiple new features in a product, as is done often by laptop manufacturers and automobile producers.
Responsiveness to customers
A company may differentiate a product based on responsiveness to customers.
When this becomes the basis for differentiation, the company offers comprehensive after-sales services, including repair.
This sort of differentiation is highly workable in the case of products that require frequent after-sales services, such as microwave ovens, television sets, computers, cars, and the like.
Responding to customers’ psychological desires
An important source of product differentiation is a company’s response to the psychological desires of customers.
Customers may desire to have a special status or unique prestige from using a product. This is especially important in the case of luxury or fashion goods and specialty products.
Many customers feel proud of having a BMW car or a Rolex watch. Sony and Samsung use prestige and distinctiveness as the basis for producing a wide-screen TV set (such as Sony Home Theater).
Wide choice of customers
Differentiation of a product may be done by making available items of any kind in the same product line instantly to customers as per their demand.
Berger Paints Ltd. has adopted a differentiation strategy by making a ‘color bank’ program.
With this strategy, any shade of color can be provided instantly to any retail paint customer. It has given a competitive advantage over the competitors.
Reliability of products
A product may be differentiated by improving its features/quality so that it becomes more reliable than the competitors’ products.
Customers consider Philips bulbs more reliable than other available bulbs in the market simply because of their reliability.
Availability of spare parts/peripherals/accessories
When a company guarantees the easy availability of spares and other necessary accessories, customers are attracted to them.
Toyota’s spare parts are more abundantly available than, for example, Civic, Honda, or Mitsubishi.
It is thus obvious that based on the nature/use of the product and the nature of the target customers, products can be differentiated along with various themes.
Themes for differentiating products and services
| Themes | Examples of applicability |
|---|---|
| Unique taste | Food products, such as bread, drink, juice, chocolate, etc. |
| Multiple features | Automobiles such as Toyota and Mercedes-Benz, and software such as Microsoft Office. |
| Wide selection/one-stop shopping | Retail chain shops such as Agora, Walmart and Target |
| Special features | Transparent ball pen or soap or halal soap. |
| Superior service | Overnight delivery of parcels by a courier service company |
| Prestige and distinctiveness | 56-inches television set or Sony Home Theater; Rolex watch. |
| Product reliability | Revlon Company or Max Factor in cosmetics; Philips in bulbs; Partex in vinyl boards. |
| Full range of services | Hospitals |
| Availability of spare parts | Toyota automobiles, Sony television sets. |
| A complete line of products | Aluminum products. |
Market Situations Favorable for Differentiation Strategy
Managers wonder, will our differentiation strategy at all work in the marketplace?
When will the differentiation strategy work best?
The answer is not easy. In reality, a differentiation strategy may not be suitable for all types of products or in all kinds of market situations.
lt is likely to work best when;
- Several ways of differentiation exist in products.
- Buyers highly value the differentiated attributes of the product.
- There is diversity in buyers’ needs.
- The competitors are pursuing different/unique differentiation approaches.
- Rapid technological changes and innovation make the industry volatile.
- Competition is revolving around rapidly evolving product features.
Let’s discuss the issues more elaborately.
Ways for differentiation
If the ways to differentiate a product are limited, it becomes difficult to profitably differentiate the product. Differentiation strategy works well in situations where there are many ways to differentiate the product.
Buyers’ perception
Differentiation will also be successful if a large number of buyers perceive that the differentiation is valuable. Buyers must benefit from the J differentiation to be successful.
Diversity in needs
Buyers usually have differences in their preferences.
One group of buyers may prefer one combination of product features. But another group may not like the same features.
The existence of such differences in buyer preference facilitates a company to pursue different approaches to product differentiation.
Different approaches to differentiation by different competitors
Another situation where companies may be successful with a differentiation strategy is a situation of following different approaches of differentiation by different companies who are competitors.
When few competitors follow similar differentiation approaches, there is less chance of head-to-head rivalry among them.
This is because companies try to attract customers based on a different combination of features.
Technological change
When there are rapid changes in technology and product innovation, companies can go for a differentiation strategy to maintain buyer interest in the product.
Competition around evolving features
A product may be subject to evolving gradually around different features. That means there are changes in the features of the product regularly.
If the market situation is such that competition among the companies centers around rapidly evolving product features, the firms can pursue separate differentiation approaches.
To maintain the interest of the buyers, the company may indulge in rapid product innovation and the introduction of new versions of the product frequently.
Reasons for Failure of Differentiation Strategy
The common reasons for failure in differentiation strategy include:
Attributes with little value
It is quite natural that consumers will be interested only in such new product attributes that will give them value.
If the firm fails to consider the consumer’s perspective in terms of the value of the attribute, its differentiation strategy is bound to fail.
Easy to copy
The differentiation strategy will fail if the competitors can quickly copy or imitate the differentiated features; in that case, buyers will find no difference between the products of competitors.
Inability to benefit buyers
Differentiation does not work when buyers perceive that it could not reduce their cost or increase lead stomach their well-being.
Over-differentiation
One important reason for the failure of a differentiation strategy is the over-differentiation of the product.
Over differentiation occurs in a product when differentiation leads to a much higher price than the price of the competitors. Overdifferentiation may also occur if differentiation of a product causes product quality to exceed buyers’ needs.
Failure to understand buyers
Differentiation will fail if the company cannot understand what buyers consider as necessary or attractive.
Every differentiation must be done based on the buyer’s viewpoint, not the viewpoint of the company.
Buyers’ satisfaction with basic product
When buyers are satisfied with a basic product (originally launched product or the currently offered product), the differentiation strategy may fail.
Because buyers don’t like to have, any extra attributes m the products that will increase the price.
It thus appears that a differentiation strategy may not always work. It is difficult to give any guarantee that the differentiation of a product would result in a competitive advantage in the market.
Success depends on careful analysis of buyers’ needs and their perceptions.
Let the buyers say what kind of new features they want to have in the product. You can gauge the perception of buyers through consumer surveys and market intelligence.
Sustainability of Differentiation Strategy
The sustainability of differentiation strategy is an important issue for a company.
If product differentiation cannot be sustained, the company may incur huge losses. This necessitates the confusion of a consumer survey to determine the needs and preferences of buyers.
Based on the survey results, the company should undertake initiatives to incorporate unique attributes in its products.
Additionally, a company needs to address the following issues to achieve sustainability:
- The company must try to adopt those differentiation approaches that would be hard or expensive for the competitors to copy (or duplicate). However, strong competitors might be able to clone any feature of a product over a while. For example, when Nokia introduced video cameras and internet capabilities in the mobile sets, Samsung and LG followed suit within a few months.
- Differentiation has to be linked to ‘core competencies, unique competitive capabilities, and superior management of value chain activities.’ The basis for a company’s product differentiation would be sustainable if the competitors cannot readily match their competencies with those of the company! Sustainability can also be achieved if competitors cannot manage the value chain activities as unique as the company itself.
- A company may ensure the sustainability of differentiation when it can base its differentiation on new product innovation, technological superiority, quality, reliability, unique competitive capabilities, and superior/comprehensive customer service. This issue is very important because it would be tough for the competitors to copy these differentiating attributes easily.
- The differentiation attributes must be of value to customers. A particular differentiating attribute may seem to the company very valuable and appealing. Still, if it is viewed by customers as having no or little value, the differentiation strategy will never sustain.
It thus appears that the differentiation strategy may not always work. It is difficult to give any guarantee that the differentiation of a product would result in a competitive advantage in the market.
Success depends on careful analysis of buyers’ needs and their perceptions. Let the buyers say what kind of new features they want to have in the product.
Quality and Differentiation: A Path to Sustained Competitive Advantage
Differentiation strategies are an attractive competitive tool whenever buyers’ needs and preferences are too diverse to be fully satisfied by a standardized product or by sellers with identical capabilities.
To be successful with a differentiation strategy, a company has to study buyers’ needs and behaviors carefully. Competitive advantage results once a sufficient number of buyers become strongly attached to the differentiated attributes.
Differentiation yields a longer-lasting and more profitable competitive edge based on new product innovation, technical superiority, product quality and reliability, comprehensive customer service, and unique competitive capabilities. A large group of companies highly prefer quality as a differentiation strategy.
Competing on Superior Product Design
Differentiation based on product design comes from unique attributes and features that buyers will consider valuable. It is important to incorporate product attributes and features that lower the buyer’s overall cost of using that company’s product.
Competing on Service
It is difficult to deal with the quality issues in the service rather than the industrial products. It is also difficult to define the quality specifications in the service sector precisely. There is a wide divergence in the way customers perceive and describe the quality of the same service.
Thus, the quality of service is determined by the way the customer perceives rather than how it is provided. The consumer becomes the supreme judge of quality. There are five quality indicators in the service:
- Inter-personal relationship
- Timing and punctuality
- Best here and now
- Indirect evidence of quality
- Consumer perception
Differentiation can be on the basis of very high service (24 hours, seven days a week) or very low service (self-service). A low service level is assumed that customers are not prepared to pay for a higher service level.
Competing on Variety
Firms also compete on the basis of product variety. There are very few firms that compete on the basis of a single product. Industries such as electronics, consumer goods, telecommunication, garments, etc., offer different products and services according to the customers’ needs.
Competing on Innovations
The ultimate success of a differentiation strategy is that customers expect new innovative products that satisfy their needs completely. Apple has long been identified as a manufacturer of high-quality and innovative products such as the iPhone, iPad, iPod, etc. Examples are its ability to continually redesign and re-release its products in line with the current needs.
Competing on Time
Differentiation can be based on time. Many firms are competing on the basis of time, such as on-time production, delivery, response to customer needs, etc. For example, FedEx, DHL, and UPS always compete against each other by serving their customers on a timely basis.
