A Strategy of Differentiation

The approaches to differentiating one’s product from rival firms take many forms: a different taste; special features; superior service; spare parts availability; overall value to the customer; engineering; design; performance, usual quality and distinctiveness; product reliability; quality manufacture; technological leadership; convenient payment; a full range of services; a complete line of-products; and top-of-the-line image and reputation.

Differentiation is the main concept underlying the Brand concept as well.  There is no benefit to trying to develop an undifferentiated brand – that is in itself an oxymoron.  Branding and differentiation go hand in hand. Differentiation provides insulation against the strategies of rivals because customers establish a preference or loyalty for the brand or model they like best and are often willing to pay a little (perhaps a lot!) more for it.  In addition, successful differentiation:

(1) erects entry barriers in the form of customer loyalty and uniqueness for newcomers to hurdle,

(2) mitigates the bargaining power of large buyers since the products of alternative sellers are less attractive to them, and

(3) puts a firm in a better position to ward off threats from substitutes to the extent that it has built a loyal clientele.

To the extent that differentiation allows a seller to charge a higher price and earn bigger profit margins, then the seller is in a stronger economic position to negotiate with powerful suppliers.  Thus, as with cost leadership, successful differentiation creates lines of defence for dealing with the five competitive forces.  Employing a differentiation strategy also has risks:

The cost of adding enough product attributes to achieve differentiation can result in such a high selling price that buyers opt for lower-priced brands.  Buyers are usually willing to pay only so much extra for differentiation; when this extra differential is exceeded, low-cost/low-price firms gain an edge over firms pursuing high-cost differentiation.  In such circumstances, despite the unique product features offered by the high-priced firms, a cost-leadership strategy can defeat a differentiation strategy.

Over a period of time, buyers may decide that they do not need or want extra features, concluding that a basic or standard model serves just as well.  Then the market emphasis shifts away from differentiation toward a commodity product situation where the name of the game is low-cost, efficient production of a more or less standardised product.

Rival firms may imitate the product attributes of the leaders to an extent such that buyers see little meaningful difference from seller to seller.  The differentiation attempts of rivals thus cancel each other out and buyers shop chiefly on the basis of price.

The most appealing types of differentiation strategies are those that are least subject to quick or inexpensive imitation.  Here is where a distinctive competence comes into play.  When a firm has skills and competences that competitors cannot match easily, it can use these skills as a basis for successful differentiation.

Differentiation is most likely to produce an attractive and lasting competitive edge when it is based on:

Elemets valued by the target market

Technical superiority.

Quality.

Giving customers more support.

The appeal of more value for the money.

As a rule, differentiation strategies work best in situations where:

(1) there are many ways to differentiate the product (goods and services) and these differences are perceived by some buyers to have value,

(2) buyer needs and uses of the item are diverse, and

(3) not many rival firms are following a similar differentiation strategy.

Often, the most attractive avenue for product differentiation is the one least travelled by rival firms as the saying goes, “never follow the crowd.”

Eexperience indicates that it is hard to excel in several approaches to differentiation simultaneously.  Attempting to differentiate in many ways at once can deteriorate into trying to be too many things to too many people, thus blurring the image the firm presents to its target markets.  In formulating a differentiation strategy it is usually wise to stress one key value and to develop a distinctive competence in delivering it.  It can also be a good tactic to select a basis for differentiation that (a) makes it easy for first-time buyers to try the product and (b) makes it hard for regular users to abandon the product (because the costs of switching to other brands or substitutes are high).

What is your experience?  What are your views?

Dr. Brian Monger

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