In situations where consumer requests and preferences due to their diversity cannot be satisfied with standard products or the previous composition of sellers, differentiation strategies are applied. For successful differentiation, the company must study the requests, behavior, preferences of customers and their idea of the consumer value of the goods. After that, the company adds to its product or service consumer properties that are most valuable from the point of view of buyers, and at their expense creates a clear difference from the product or service of competitors. Competitive advantage will appear when new properties of the product attract a sufficient number of buyers. The more buyers appreciate these differentiating properties, the stronger their commitment to the company’s products and, accordingly, its competitive advantage. Therefore, the strategy of differentiation is to offer the consumer a product with unique consumer properties and maintain this uniqueness for a long time.
Successful differentiation allows the company to: assign a higher price to its product or service and / or increase sales (the distinctive consumer properties of the product attract additional customers), and / or increase the level of customer loyalty to its brand (some buyers highly appreciate the additional consumer properties of the product).
Differentiation is successful if it provides an increase in sales revenues, i.e. costs for it are covered by increasing the price of updated and changed goods. Differentiation is unsuccessful if buyers do not consider the additional properties of the product sufficient to prefer it to the goods of competitors, and also if the methods of differentiation are easily copied by competitors.
There are different ways to differentiate. Here are examples of some differentiating properties of goods and services: unique taste (Dr. Pepper, Listerine), a variety of consumer properties (Microsoft Windows, Microsoft Office), a large selection and simple purchase procedure (Note Depot, Amazon.com), a unique service (FedEx), urgent delivery of spare parts (Caterpillar), delivery of spare parts to any point in no more than 48 hours, in case of violation of the terms – delivery is free), increased consumer value at the same price (McDonald’s, Wal-Mart), unique design and finish (Mercedes. BMW), prestige and uniqueness (Rolex watches), reliability and safety (products for children Johnson & Johnson), quality of workmanship (Karastan carpets, Michelin tires, Honda cars), service (brokerage services charles Schwab), a wide range (Campbell soups), image and reputation (men’s clothing Ralph Lauren, goods for women Chanel, hotels Ritz-Carlton).
Product differentiation, which is easy to copy, does not provide a sustainable competitive advantage. The most promising opportunities for differentiation open up where it is difficult or too unprofitable for competitors to reproduce the company’s actions. A strong competitor will be able to reproduce almost any product or consumer property over time. If American Airlines offers a special program for frequent flyers, So can Delta; if Ford offers a 50,000-mile mileage guarantee for its vehicles, volkswagen and Nissan could take the same steps. Therefore, sustainable differentiation of the product is possible only on the basis of key competence, unique competitive capabilities and effective management of the company’s value chain. As a rule, a stable and profitable differentiation strategy is based on an innovative product, technical superiority, high reliability and product quality, developed service and unique competitive opportunities [15 p.167].
Differentiation is not limited to the sphere of quality and service. Opportunities for differentiation exist at all levels of the industry value chain: procurement and procurement; R&D to create new products and improve existing ones; R&D to improve production and related technologies; production process; external logistics and sales, marketing, sales and customer service [42 p.124].
As mentioned above, in order for a differentiation strategy to be successful, it must be based on distinctive properties that competitors cannot reproduce. There are four ways to give the product distinctive consumer properties that are attractive to consumers:
Giving the product consumer properties that reduce the consumer’s costs for its use. For example, it is possible to reduce the consumption of consumer materials associated with the use of goods (delivery of parts with high processing accuracy), reduce the consumer’s inventory (delivery just in time), increase the reliability of the goods (reduce the cost of repair and operation), introduce electronic reception and processing of orders (reduces the consumer’s costs for ordering, purchasing, obtaining technical support); Increasing the efficiency of the use of goods by the consumer. Ways to improve the efficiency of the use of goods or services can be as follows: increasing reliability, durability, ease of use; improving safety, including environmental safety, reducing operating costs; ensuring better compliance with environmental and legal requirements for goods; providing customers with the opportunity to update and modernize the product when a more advanced model appears on the market; improvement of its goods in such a way that the purchasing company can modify them at its discretion [42 pp.135-138]; Giving the product consumer properties that provide non-economic or intangible advantages. Goodyear’s new rainy weather tires have increased the car’s stability on wet asphalt. Rolls-Royce, Tiffany and Gucci have secured a competitive advantage by positioning their products as related to high social status and prestige, as well as due to the originality of design, high quality and image of luxury; Creating additional customer value through competitive opportunities that competitors do not and cannot have. A successful differentiation strategy based on a company’s unique capabilities that cannot be replicated by competitors begins with an examination of customer needs and ends with the creation of an organizational structure that meets those needs better than the competition. Japanese automakers bring new car models to the market faster than their European and American competitors, which allows them to respond faster to changing consumer preferences. CNN meets the need for operational information faster and more completely than other television companies. Microsoft has unique experience in combining the work of programmers with non-traditional marketing solutions, know-how, design, methods of promotion and advertising.
It should be noted that the differentiation of goods is usually associated with an increase in costs. In order for differentiation to be profitable, it is necessary either to maintain the costs of its implementation below the level of profit that will be provided by an increase in the price of an improved product, or to compensate for low profits with a large volume of additional sales. It is best to add new traits if they are not associated with large costs, but improve customer satisfaction. Federal Express has installed a system on its website that allows customers to track the passage of a postal item by the number of the postal receipt. Some hotels and motels install coffee makers in the rooms or offer free breakfast in the lobby; playgrounds for children are being built near McDonald’s establishments [15 p.181].
The differentiation strategy is optimal when:
there are ample opportunities for differentiation, and most consumers consider additional properties to be really valuable (otherwise differentiation is not economically justified); the needs of buyers and the ways of using the goods are diverse (different buyers prefer goods with different combinations of consumer properties; the more diverse the requests of buyers, the more opportunities for differentiation of goods by different properties, which avoids unnecessary differentiation by the same parameters); competitors have chosen different directions of differentiation (the risk of fierce competition is reduced); the industry is characterized by the rapidity of technological and innovative processes, and competition is based on the rapidly changing properties of the product. Constant updating of the product and the frequent appearance of new modifications support the interest of consumers in the product, allow you to implement various options for differentiation.
There are also drawbacks to the differentiation strategy. Any effective variant of the differentiation strategy can generate followers. There is no guarantee that differentiation will bring a significant competitive advantage. If the buyer does not see much value in the unique consumer properties of the product, then the differentiation strategy will meet the skeptical attitude of the market. Differentiation will not give the expected result if competitors can quickly reproduce the distinctive consumer properties of the company’s product. The rapid copying of successful features means that no company in the market benefits from the given strategy of differentiation: as soon as one company develops a combination of consumer properties that can attract the attention of the consumer, competitors immediately reproduce them, and equilibrium is restored in the market again. Thus, if a company wants to gain a sustainable competitive advantage, it must build a differentiation strategy on such distinctive features of the product that are difficult or impossible for competitors to reproduce. The strategy of differentiation may be unsuccessful in the following circumstances [42 pp.160-162]:
Creation of a differentiating property, which from the buyer’s point of view does not reduce his costs or does not give him new advantages; Excessive differentiation, when the price far exceeds the price of competitors, and the properties of the product (service) exceed the needs of the consumer; Too high a price for additional consumer properties (the higher the price, the more difficult it is to keep customers from switching to competitors’ products with lower prices); Refusal to notify consumers about new properties of the goods in the expectation that the buyer himself will notice and evaluate them; Misunderstanding or ignorance of what properties of the goods the buyer considers valuable.
A cost leadership strategy may prove more fruitful than a product differentiation strategy if buyers are satisfied with the set of consumer properties in the standard product model and are unwilling to pay an additional price for new consumer properties.