Differentiation strategy is Advantages and disadvantages of the strategy

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Strategy of differentiation is one type of strategy aimed at gaining an advantage over competitors. At the same time, the activity of the enterprise is aimed at providing more benefits to consumers by offering goods made at a high level, along with a full range of additional services, while the prices are justifiably high.

The strategy of broad differentiation is a set of different strategies that allow a company to offer the market a unique product that can interest buyers. A bet can be placed on a unique design or feature, on the addition of one additional feature or feature, on attracting consumers with a pricing policy.

Definition

Companies have the ability to differentiate personnel, product, image and service. The product differentiation strategy is aimed at highlighting the product produced by the companyin a market full of similar offerings. In other words, a product is offered that has better characteristics than competitors.

A differentiation strategy is a breath of fresh air in a market filled with many similar products. Companies that choose this path are throwing all their efforts into creating and bringing to market a product that has more utility for consumers than the products of competitors, but at the same time is in limited demand. The company whose product has the highest value for the consumer, which at the same time can be paid to them, gains a greater competitive advantage.

Of course, adding certain properties to a product leads to an increase in the cost of its production. However, such costs, if the market is successfully conquered, are covered by a higher price. Winning a larger market share brings more sales, and therefore additional profits for the company.

Steps to differentiating

A company that decides to pursue a competitive product differentiation strategy must meet 3 conditions:

• determination of the necessary characteristics for the manufactured product;
• analyzing all the properties and characteristics of products manufactured by competing companies;
• compilation of the necessary list of consumer properties of the goods that are needed by buyers in each market segment.

Following all 3 steps allows the company to find its niche and, by applying one of the strategiesdifferentiation, release a product that will be in demand by consumers.

Vertical and horizontal differentiation

Specialists distinguish between vertical and horizontal differentiation. Horizontal differentiation implies that the company develops different products for different groups of consumer needs, vertical differentiation, on the contrary, involves the release of products that satisfy one consumer need. A combination of both types of differentiation is possible in one company portfolio.

If a company chooses a strategy of using exclusively horizontal differentiation, then it releases a product for each specific need of consumers that is necessary here and now. If the company focuses on vertical differentiation, then it releases products that satisfy one specific customer need.

Differentiation by price

In this case, the differentiation strategy is putting up for sale a product that satisfies the same consumer needs as the products of competing manufacturers, but at a different price: lower or higher.

Price cuts are used to attract a mass group of customers who want to save money. Price increases are used to attract customers who pay attention to the prestige and status of the goods, design and high speed of service.

For example, cosmetic companies often release a particular product in a limited collection, collaborating with a well-knownmake-up artist or popular artist. The properties of the product remain the same, but the limited and prestige of the collection forces consumers who pay attention to these characteristics to purchase goods at a higher price.

Concentration in one market niche

A differentiation strategy is not only an attempt to meet the needs of different consumers in all market segments, but also the ability to choose one niche to increase sales in it. Small companies prefer this approach.

By choosing a niche with customers who have specific needs, a company can focus on producing a product that satisfies them. An “ideal” product is being created that will spark consumer interest in one niche, but will not be of interest to the market as a whole.

Service differentiation

In this case, the differentiation strategy is the offer of a higher quality list of services that accompany the product being sold. This may be a longer period of warranty service for the goods, as well as the possibility of post-warranty service, the possibility of free or urgent paid delivery of goods to the client, regardless of the location of the latter. In addition, customers may be offered training and advice on the use of the purchased product.

Modern companies, especially those producing electronics, use the possibility of a free update of the operating system of the product as a service differentiation. When a new system comes outthe client receives a notification, and he can independently update the software on his phone, laptop, etc. This is exactly what the American company Apple does.

Image differentiation

Differentiation strategy is the creation or improvement of the company's image, or the products that the company produces. The goal is to increase customer loy alty. For example, Apple, thanks to its image, has a larger market share and higher consumer loy alty than competitors, while products are generally similar for all manufacturers. The Marlboro cigarette company has the same success. With similar characteristics and tastes of cigarettes from different manufacturers, it is Marlboro that has greater consumer loy alty and market share.

Differentiation of the image allows the company to produce different products, presented in different segments and under different brands.

Staff differentiation

When staff is differentiated, staff is trained, which subsequently works more effectively with customers than employees of a competitor company. A friendly approach to customers, quality knowledge of the product being sold, well-delivered speech - all this distinguishes well-trained staff. Most often, this strategy is used in the service sector.

Differentiation through packaging

There is also differentiation through changing the design and shape of the package. The company, creating a unique design of its own products, seeks to highlightproduct on the store shelf, draw the eyes of buyers to it. Unique packaging, catchy design - all this can increase sales and make the company more competitive.

An example would be companies that produce a classic, popular product in limited edition packaging for a specific event. For example, it can be cases for smartphones packed in a new box with a new design dedicated to the 2018 FIFA World Cup in Russia. The properties of the product do not change, however, bright packaging and appropriate design associated with current events increase demand and recognition among consumers. For example, Nike often differentiates through packaging.

Benefits of a differentiation strategy

The benefits of using this strategy:

• increasing consumer loy alty to the company's products;
• high barriers to entry driven by customer preference;
• The influence of buyers on products is reduced due to its unique properties;
• receiving additional profit, due to this relationship with suppliers are facilitated;
• shaping a favorable company image.

The successful differentiation strategy of the company allows setting a higher markup on manufactured products, as well as increasing the volume of sales. Achieving consumer loy alty can bring an increase in loyal customers who tend to become attachedto certain differentiating features.

Possible risks of the strategy

Using a differentiation strategy is also subject to certain risks, namely:

• may reduce consumer demand for differentiated products, leading to company losses and production inefficiencies:
• excessive costs of creating and maintaining the company's image;
• unique characteristics of products may not be understood by consumers and may be excessive for them, the buyer will not feel the difference between quality and price and will prefer competitors' products;
• reducing the benefits of a differentiation strategy if the product is very similar to competitors' products.

Companies also need to remember that a special characteristic or property of a product can be copied by competing manufacturers after a while, and the resulting product will lose its uniqueness. Having received the opportunity to purchase a similar one from a competitor company at a lower price, the consumer in most cases will take advantage of it. It is important for a company that has embarked on the path of differentiation not to stop at one site and, having reached it, each time improve the image, service, characteristics and quality of the product.