Differentiation Strategy As the Source of Competitive Advantage
What is differentiation strategy, and how the differentiation strategy can help you to stand out from the competition
Let’s take a look at what the differentiation strategy is, and why it is important.
What is differentiation?
Differentiation is needed for your business to set yourself apart from the competition. When your products are distinct, they have a higher chance of resonating with your customers’ needs and be noticed by them. As a result, business differentiation will help you achieve, increase, and sustain your competitive advantage.
Why do I need a competitive advantage?
Competitive advantage helps you to be distinguished from your competitors. It is based on a combination of core competencies that your company offers, its strengths and the opportunities in the marketplace. Literally, it means getting ahead of the competition. As such, it is one of the most significant goals of any company. Without a competitive advantage, your company may be left behind.
What Is the Differentiation Strategy?
Differentiation strategy is a way how you would achieve differentiation of your products or services, and how you can make them unique, authentic, and distinct in the marketplace. The differentiation strategy is closely aligned with the product strategy. The outcome of the differentiation strategy – is a well-established plan to enhance your products, and make them more authentic.
What is a focused differentiation strategy?
Focused differentiation strategy happens when a company decides to focus its efforts and outperform its competitors in one specific area. Such an area could be a combination of a product feature, for example – a lifetime warranty and a distribution channel, such as an eCommerce store of your company. The sharper is your focus, the more significant difference you will receive with your efforts. In contrast, if you do not achieve a sufficient degree of focus, your efforts will be dispersed, and may not achieve as high differentiation as you desire.
When a differentiation strategy works best?
Product differentiation strategy works best when:
- There are diverse needs in the marketplace that lead to more than one way how customers would consume your products.
- There are diverse channels of distribution. Differentiation will help your customers to pinpoint the source of your products – that they are coming from your company.
- Product evolution is aligned with the changes in customer demand. This way, you will gradually introduce differentiation features in your product without upsetting your existing customers.
- When the purchasing patterns in your industry do not invalidate your differentiation efforts. For example, if your customers purchase services only via a standardized RFP process, you may not be able to use many differentiation techniques, as that process is set out to achieve standardization.
- You combine several product differentiation techniques and don’t go overboard with either of them.
- You are the first to leverage a very specific differentiation strategy, and when your competitors are not imitating you.
What are the benefits of a differentiation strategy?
Differentiation strategy has many advantages and benefits. Ultimately, it will lead to better competitive positioning for your brand. Differentiation strategy will help you to:
1. Bridge the gap between the market demand and your product features.
Differentiation strategy helps to bridge the gap between the demand in the market place and your products – in a unique way. More specifically, when you differentiate – you implement unique and innovative product features or product branding, which helps you to connect with your customers in new ways.
2. Differentiation strategy helps to increase customer loyalty.
Specific unique or distinguishing traits or characteristics of your product help your customers distinguish your product from the competition. As a result, your customers will be “hooked” on your product, and they will have a mental link, or association between the benefits that are associated with the usage of your product, and its distinctive traits, such as bright colors that you may be using for product branding.
3. Differentiation strategy enables establishing new markets and new market segments.
When you sufficiently change your product or even introduce product features that will make your product distinct enough, your target market is no longer the same. For example, if you have an ERP (Enterprise Resource Planning) system, and you have introduced a highly productive CRM (Customer Relationship Management) module – you are no longer competing in just the ERP space, but rather – in a hybrid product space.
4. Differentiation strategy leads to the creation of the added value for your customers.
Quite often, customer needs are more diverse and are not usually fulfilled by the existing products. The needs span into other areas. Customers will benefit from the features that may not be present in the products of your competition.
5. Differentiation strategy improves profitability.
By gaining the reach to a wider market that has untapped potential, you are likely to increase the profitability of your business. You need to be cognizant of the effort that you spend on differentiation, and always make sure that your investment in differentiation generates acceptable returns.
6. It makes your product unique in the chosen niche.
Your customers can’t find a replacement for your product that will have exactly the same features and characteristics as yours does. After using your product, your customers may not be willing to switch to other products.
What are the disadvantages of differentiation strategy?
1. Significant market testing is required.
In order to determine how to differentiate, you need to perform extensive research and market testing. Otherwise – your efforts may be a long shot or a shot in the dark. To overcome this, I would suggest introducing changes gradually, observing whether they brought desired results, and only then targeting other product differentiation opportunities. You may even want to approach the A/B testing mentality – where you change only one differentiating feature of your product, let it play out, and see if it brings you the benefits that you desire.
2. Upset customers.
If you change your product’s composition, features, or branding, you may upset your existing customers and customers who may be close to making a buying decision to acquire your product. If they see the change in the product features, they may be upset or believe that you are providing them with a different product that may no longer meet their needs.
To avoid upsetting your customers, you need to establish effective communication. You can gradually prepare them for the upcoming changes and emphasize that you are listening to your customers’ feedback and needs and are introducing changes to make your product even better.
3. Benefits of differentiation are not guaranteed.
When you set out on the journey of product enhancement, the benefits are not guaranteed. Too many things may happen between the time that you have tested the market, and the enhanced product reaching your customers. That is why it is especially important to measure the effort that you put into differentiation, learn from your experience, and only then consider making your product even more distinct.
4. Distraction, and loss of focus.
Like any business, you have a finite set of resources at your disposal. When you dedicate your efforts to enhance your products’ differentiation, your company will have less time to spend in other areas.
5. Potential inefficiencies.
You are likely intimately familiar with your product and its features and attributes that may have been a part of it for months or even years. When you consider adding new attributes, features, or characteristics to your product – you may not be familiar with them. You may need to figure out how to make the changes for the first time and then – determine how to make the changes viable at a grander scale. In your differentiation strategy, you need to tie a measurement of effort that it took you to achieve the benefits to the benefits associated with your product becoming more distinctive.
6. Increased strain on resources.
As you focus on making your product richer, additional features may put the strain on your resources. New skills, competencies, or behaviors may be required. There could also be increased costs due to switching time between tasks performed by your staff.
7. Higher risks.
With differentiation, you are venturing into new territory. You may not know exactly how your product’s features, traits, or characteristics that you will introduce may play out with your existing and new customers. My recommendation is to include the assessment and ranking of possible risks and risk responses in your differentiation strategy.
What are the risks of differentiation strategy?
When you are making your product different, there may be multiple risks associated with the differentiation strategy. They can include:
- Dissatisfaction with the new product.
- The perception that the new product may no longer meet the reason why the product was acquired initially.
- Lack of faith in the company as it may be perceived to have alienated its customers.
- The new product features that you introduce may seem irrelevant, distracting, over-bloated, useless, or annoying.
- If you are not careful, additional product features may impact the usability of your product.
- Possibility of loss of some existing customers, some of which may have an exceptional lifetime value.
Why is the differentiation strategy important?
Differentiation strategy formalizes the company’s efforts to achieve the biggest difference, and the most profound business outcomes make your products distinctive in the marketplace. Without it, your company may be spending too much time on “guesstimating” what kind of measures and changes will lead to increases in customer demand and improve acceptance of your products in your customers’ eyes.
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Differentiation strategy examples
Let’s look at two different examples. In the automotive industry, Hyundai chose the warranty as one of its differentiators. It has one of the best warranties on the market – longer than what is prompted by the industry standard. It provides a 10-year powertrain warranty, while a car brand Infiniti offers only 6 years of powertrain warranty.
Infiniti is another example of a differentiation strategy. It targets a premium market segment with more advanced and more luxury features, as compared to Infiniti’s parent company Nissan, that is targeting more budget-oriented consumers.
You now understand the critical importance of the differentiation strategy. It helps your brand, product, or service stand out from the rest of the competition and be authentic, distinct, and distinguishable. Without a doubt, differentiation is one of the most critical business priorities, especially in the crowded market that may exist in your industry. Ultimately, differentiation strategy establishes a way for you to achieve a competitive advantage, and if done right, it will help your company prosper.
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