Differentiation is one of the four Generic Strategies introduced by Michael E. Porter alongside cost leadership and the two specific focus strategies cost focus and differentiation focus. Strategic managers and markets also recognize it as one of the sources of competitive advantage that is fundamental to the success of a firm and its products.
There are different ways to approach a differentiation strategy but they share a common purpose: to enable a firm take a sizeable portion of the market share and maximize its profitability or earning potential by setting itself apart from its competitors and standing out across the target market and in the entire competitive environment.
Pros: The Advantages of Differentiation
A successful differentiation strategy essentially affords a particular firm with advantages or benefits that allow it to outcompete its competitors or maneuver through the entire industry or market. The following are the specific advantages:
1. Emphasis on Unique Selling Points or Value Proposition
One of the advantages of differentiation is that it equips a product and even an entire firm with unique selling points that create a perceived value among consumers or target consumers. The value proposition is critical to set a product or the business apart from the competition.
Consider high-end smartphones as an example. These devices stand out from the rest of other devices in the entire smartphone market because they are equipped with the most advanced hardware components, have a more premium look and feel, and feature other value-added inclusions such as built-in biometrics and a better camera system.
Each high-end smartphone is also differentiated from one another. An iPhone 13 Pro banks on the hardware-software integration between the A15 Bionic chip and the iOS operating system. Xiaomi Mi 11 5G banks on affordability on top of performance capabilities.
2. Segmentation of the Market and Creation of Niche Markets
A differentiation strategy can also help a firm identify the market segment it intends to serve. It can also result in a business targeting a specific niche or opening up a new market by creating a demand for a new product or substitute.
Gaming laptops are an example of a market segment or niche within the entire laptop market. Alienware, Asus ROG, and Razer have a strong brand recall advantage because they have built a brand reputation for designing and manufacturing laptops equipped with hardware components and features that are suitable for high-end gaming.
The skincare market also exemplifies the presence of different segments and the emergence of new niches. There are skincare products for specific concerns such as sunscreens for protection from UV radiation and face toners for specific face care needs.
3. Non-Price Competition Through Differentiation
Offering low prices can also be part of a differentiation strategy. This is notable in several consumer electronics manufacturers from China. But another benefit of differentiation is that it can also allow a company to command higher prices for their products.
Apple has been notoriously known for products with higher price tags compared with equivalent products from its competitors. An iPad Mini 6 is twice to thrice more expensive than an Android device. The same is true for its iOS smartphones which are at least twice as expensive as most smartphones based on the Android operating system.
Companies that have differentiated their products can essentially compete on grounds other than prices. Note that Apple takes pride in reliability and innovation. The price of its products implies that they are better in quality and incorporate the latest technology.
4. Creating Strong Brand Equity and Establishing Brand Loyalty
A differentiated product creates a unique space in the mind of a particular consumer simply because it stands out from equivalent products in the market and even product substitutes. This can help create strong brand equity and consumer loyalty.
The Windows versus macOS and Android versus iOS debates have demonstrated how these operating systems have succeeded in creating their respecting unique selling points or value propositions. Windows has been known for its universality while macOS has been recognized by creative professionals and the younger segments of the market.
Several people prefer devices based on Android because it has offers a higher degree of customizability and flexibility while others have a strong preference toward iOS because it is an Apple product that shares similarities with other Apple products.
5. Differentiation and Better Profits or Earnings Potential
The potential for higher profitability is another advantage of differentiation. Of course, to maximize the earning potential, a firm must succeed in creating differentiated products and communicating how these products differ from the rest of the competition.
Remember that firms that have successfully differentiated their products or themselves can compete on grounds other than price. They can fundamentally charge their customers with higher prices compared to equivalent products from their competitors. Brand loyalty also helps these firms maintain a strong command over their pricing strategies.
Luxury brands such as Hermes and Louis Vuitton are expensive because they imply not only quality but also a sense of luxury that provides its consumers with some sort of status symbol. These brands can charge a premium because of these value propositions.
6. Manages and Reduces the Threat of Substitute Products
The threat of substitutes is one of the Five Forces identified by Michael E. Porter that can drive the direction of the competitive environment. A substitute product is another category of product that provides the same purpose as a comparable product.
Differentiation can reduce the threat from substitutes because it can create the perception that there are no substitute products that can meet the same features and benefits of highly differentiated products. An example would be an iPad Pro. Loyal customers would argue that this device has no equal substitute among other consumer electronic devices.
The substitutes for an iPad Pro are desktop and laptop computers, as well as smartphones. Consumers who believe in its value proposition understand that it shares functionalities with computers and smartphones but remains different because of its unique use cases.
Cons: The Disadvantages of Differentiation
1. A Differentiation Strategy Requires Capital
One of the primary advantages of differentiation is that it is inherently costly. A firm needs to invest in market research, research and development or product development, and manufacturing or production processes to create highly differentiated products.
Furthermore, the strategy does not rest alone on the introduction of a product with unique selling points. The firm needs to effectively communicate the fact that this product can do the same thing as its competitors while also highlighting how it is distinct from the rest. Doing so needs effective marketing strategy and specific promotion strategies.
Creating variations from the same product can also be costly because each can have unique production processes and marketing or promotional requirements. Consider the variants of a Coca-Cola such as a Regular Coke and a Diet Coke as examples.
2. Can Lead to Cannibalization Within the Brand
Remember that one of the ways to approach a differentiation strategy is to create variations from the same umbrella product. Coke is a prime example. Another example is the variations in smartphone brands such as the Samsung Galaxy brand.
The problem with this approach is that it could result in cannibalizing the entire brand and all of its product range. A sizeable portion of the consumers might end up buying one variant. This will become a problem if a firm produces the same volume of variants or fails to take into consideration the market size of each market segment.
A firm can prevent cannibalization through an effective marketing strategy based on insights from market research. Furthermore, it can also limit the number of differentiated product variants that it will produce and market to avoid confusion.
3. High Prices and Potential for Cheaper Imitations
Differentiated products are usually expensive. This can be another drawback of differentiation. A high price tag attached to a highly differentiated product effectively limits its market potential and can possibly result in reduced profitability.
The high price tag should be justified both by a strong value proposition and through an effective marketing strategy that can adequately communicate the product features and benefits, as well as its distinctions. Failure to do take these two into consideration can turn off potential consumers and push them to buy alternative and even substitute products.
Another disadvantage is that products with strong value propositions are susceptible to imitations. Examples are knock-offs of luxury bags and fashion items. Even established manufacturers copy some of the features of reputable products.