Business Strategy: A Closer Look At the Differentiation Strategy
Three types of generic strategies exist for businesses. These three strategies are cost leadership, differentiation, and focus. A previous article examined all three in a superficial way. Another article looked at the cost leadership strategy in more detail. This article takes a closer look at the strategy that most businesses should adopt -- the differentiation strategy.
The Differentiation Strategy
As mentioned in a previous article, the cost leadership strategy can only be successfully adopted by one firm in a market. As a result, the other firms in the market must compete for market share on a basis other than lowest selling price. This is where differentiation is useful. Differentiation occurs when a firm offers "something unique that is valuable to buyers beyond simply offering a low price."1 This unique attribute is important enough to buyers that they will pay a premium for the product and not seek the lowest price.
One limiting factor of differentiation is the physical characteristics of the product or service. The more technology that is involved, the more the possibility for differentiation. For example, a sheet of printing paper does not involve a great deal of technology, so there are few physical characteristics about which to differentiate. However, an item such as a computer can have a great deal of technology embedded in it and, therefore, has many avenues with which to differentiate. Even though physical characteristics may limit differentiation, Grant states, "Beyond these constraints, the potential in any product or service for differentiation is limited only by the boundaries of the human imagination."2 Differentiation, therefore, is a function of human creativity.
There are two types of product differentiation. The first is tangible differentiation where there is a physical difference in the given product compared to all others. Some of these attributes might be taste, color, speed, storage capacity, or durability. Customers might value some physical feature of the product that is not present in any other similar product. One example of this was when GM promoted OnStar as a feature on its vehicles. No other company at that time had OnStar and GM used it as a tool to capture market share.
The second type of product differentiation is intangible. Intangible differentiation occurs based on customer perceptions. Creating a brand name is intangible differentiation. Products that seem to meet societal concerns is intangible differentiation. One possible example is GE Capital's elimination of financing for gun sales. CE Capital could be creating a differentiation, hoping to court favor with potential customers who are in favor of gun control.
No matter the type of differentiation, a firm that differentiates properly has more security in a basis for competitive advantage than a cost leadership strategy.2 Firms that have good differentiation can create exclusiveness among the customers and can create great customer loyalty. This protects the firm's market share and, consequently, the profits for the firm. Porter states that differentiation "creates a defensible position for coping with the five competitive forces."1
This article has examined the differentiation strategy in a little greater detail. Many firms in an industry should be adopting this strategy. Therefore, it is very important that one understand differentiation so as to use it to gain and maintain competitive advantage. A product must have some unique attribute that management is willing to exploit and customers are willing to spend extra money for. This will build brand loyalty and a solid product image.
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1Porter, M. E. (1980). Competitive Strategy. New York, NY: The Free Press.
2Grant, R. M. (2002). Contemporary strategy analysis (4th ed.). Malden, MA: Blackwell Publishers Ltd.