A Business Encyclopedia

Differentiation Strategy

Definition: Differentiation strategy, as the name suggests, is the strategy that aims to distinguish a product or service, from other similar products, offered by the competitors in the market. It entails development of a product or service, that is unique for the customers, in terms of product design, features, brand image, quality, or customer service.

Differentiation strategy is one of three Porter’s Generic Strategy; others are cost leadership and focus.

When a firm pursues differentiation strategy, it attempts to become unique in the industry, by offering those products and services, which have value to the customers. In this strategy, the firm picks one or more such dimensions that are regarded as important by the customer’s flock. In this way, the firm succeeds in creating a unique image in the market and gets the premium price for its uniqueness.

Basis of Differentiation

  1. Product: To have an edge over the competitors, a company can offer innovative products to its customers that best fulfils their requirements. This may involve a huge cost in research and development, production and marketing. Nevertheless, the return on investment is more than the cost involved, as the firm becomes the market leader in offering that product.
  2. Pricing: Market forces, i.e. supply and demand decides the price of the product, so it tends to fluctuate and is greatly affected by product value to the customer. To gain differentiation through pricing, either a firm can charge the lowest price for its product or gain superiority by charging maximum prices.
  3. Organisation: Differentiation can also be based on organization, wherein a firm earns success through the brand name, location advantage, goodwill and customer loyalty etc.

Nevertheless, the strategy is subject to certain risks like imitation by competitors, change in trend, change in customer tastes etc.

Attaining Differentiation

A firm can incorporate the following measures to attain differentiation:

  • Provide utility to the customers, by offering such product that perfectly matches their needs and preferences.
  • Product innovation
  • Increase product performance
  • Set the price of the product¬†based on the features of the product and purchasing power of the customer.
  • Create a brand image, by ensuring better quality, services and customer satisfaction.

To successfully implement differentiation strategy, all a firm needs to do is a careful analysis of customer’s requirements and preferences, to identify the feasibility of integrating various differentiating features into a unique product, that contains desired attributes.

On the successful implementation of the strategy, the firm can price the product higher than its competitors and receive customer loyalty, as the consumers may be accustomed to the unique features. Differentiation features may include, product performance, ease of use, useful life, superior service and so forth.

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