A differentiation strategy comprises all business-level decisions and initiatives aimed at developing and offering products that have qualities or unique selling propositions that differentiate them from equivalent products or substitutes from competitors.
Michael E. Porter introduced differentiation as one of the four Generic Strategies, alongside cost leadership strategy, and the two focus strategies: cost focus and differentiation focus in his 1985 book “Competitive Advantage: Creating and Sustaining Superior Performance.”
The advantages of differentiation center on enabling a business or firm build and gain a competitive advantage by promising specific product features and benefits that are inherently unique from the competition and attractive to the target market.
But how to exactly develop and implement a successful differentiation strategy? What are the ways to differentiate a product and an entire business from the competition? This article lists and discusses the pointers, elements, and examples of a differentiation strategy.
Developing and Implementing a Successful Differentiation Strategy: A Guide on How To Differentiate A Product or Business from the Competition
Broad Versus Focused: Two General Types of Differentiation Strategy
Remember that two of the four Generic Strategies identified by Porter are about developing, implementing, and leveraging differentiation as a competitive advantage. These two also translate to the two general types of differentiation strategy: broad differentiation strategy and differentiation focus or focused differentiation strategy.
The following are the differences between the two:
• Broad Differentiation Strategy: A firm develops and markets a good or service with unique characteristics and selling points or features and benefits for an established market and thereby, for a broad pool of target customers.
• An example would be a consumer electronics manufacturer that produces a smartphone with the most latest and high-end hardware components, as well as value-added features such as advanced camera components or a foldable or flexible display.
• Focused Differentiation Strategy: A firm divides a broad market into segments or targets a niche market by creating new market demand. This firm develops and markets a differentiated product focused on this particular segment or niche.
• An example would be a computer manufacturer that produces desktop or laptop computers for gamers. Another example is a food and beverage company producing whole foods or vegan products for health-conscious consumers.
Ways to Differentiate: Differentiation Strategy Pointers and Elements
There are different ways a firm can differentiate its business or products. Note that the purpose of differentiation is to gain a competitive advantage by standing out from the competition through goods or services with unique selling propositions or product features and benefits that are distinguished from the products of the competitors.
Below are the important pointers to take into consideration:
• Market Research: A firm needs to gather data and information about its target market and customers to understand and take note of their needs and wants, have a better grasp of the overall competitive environment, and/or identify gaps or openings in the current market that can be exploited. Insights from market research are essential to developing and deploying a successful differentiation strategy.
• Product R&D: Information from market research can also help a firm in developing a product that addresses the needs or wants of the target customers or fills in the gap left unaddressed by existing products from the competitors. Of course, a firm needs to have both research and production capabilities because these are essential in developing innovative, highly differentiated, and attractive products.
• Marketing and Promotion: The overall marketing strategy and its specific activities collectively represent another important element of a successful differentiation strategy. A firm needs to identify the unique selling points or value proposition of a differentiated product based on market research and R&D initiatives while also effectively communicating these qualities to the target customers and highlighting how it is distinct from the products of its competitors.
• Value Addition: There are other ways to differentiate beyond creating a product with distinctive features and benefits. These include a suitable pricing strategy, effective distribution channels or product accessibility, after-sales services and value-added inclusions such as perks and privileges, brand loyalty that creates a consumer subculture, and customer responsiveness, among others.
A differentiation strategy should demonstrate that a product or firm has all the features and benefits of the alternatives but with the addition of other features and benefits that make it distinctive from the rest. However, it is also important to highlight the fact that this strategy does not rest alone in product differentiation.
The following are the different approaches to differentiation strategy:
• Product Differentiation: Focuses on distinctive value proposition or unique selling points such as unique features and benefits, performance and reliability, and durability, among others. Examples include wearable devices for athletes, tablet computers for creative professionals, electricity-powered vehicles, sustainably-sourced clothing products, food and beverage products for fitness enthusiasts.
• Service Differentiation: This centers on providing value-added services on top of a particular good or service. Examples include ordering and delivery convenience, personalized customer service and technical support, after-sales services, product guarantees and warranties, and rewards and loyalty programs, among others. A specific example would be a firm that manufacturers and markets home appliances but also provides free customer consultation and online-enabled customer support to differentiate itself from other home appliance manufacturers.
• Distribution Differentiation: A firm can also differentiate itself by optimizing its distribution channels to make its products more accessible to the target market. Apple products are readily available to the market compared with equivalent products from other manufacturers. Apple operates its own physical and online storefronts in different countries while also licensing third-party distributors to sell its products. Smaller companies take advantage of electronic commerce and third-party online stores to make their products more accessible to online-enabled target consumers.
• Relationship Differentiation: This is similar to service differentiation but it focuses on building and maintaining relationships to translate to customer loyalty. This is prevalent in service-oriented industries and sectors. An example would be an airliner that has a rewards program for frequent flyers or provide its customers with access to an airport lounge. Another example is a bank or a financial service institution that provides personalized banking experience to exclusive clients through a dedicated financial advisor who oversees individual accounts.
• Brand Differentiation: Other firms can offer less differentiated products but still succeed in their differentiation strategy due to their respective brand image alone. Apple is a notable example. The brand has established itself as an innovator and all of its products effectively communicate durability and reliability. Brand differentiation is also unique to luxury brands such as Hermes and Louis Vuitton. These firms are fundamentally unique because their brands and products, as well as their overall image or reputation, communicate tangible and intangible features and benefits.
• Price Differentiation: Another way a firm can differentiate its product or itself from its competitors is through its pricing strategy. Chinese consumer electronics manufacturers such as Xiaomi and Vivo have differenced themselves from bigger companies such as Apple and Samsung by offering products that are considerably more affordable without sacrificing quality and performance. The same is true for fast-fashion retail companies. Other firms can set themselves apart from the rest through a premium pricing strategy, thus communicating a sense of luxury and quality.