Friday, July 1, 2011

Porter’s Differentiation Strategy & Ways of Achieving it


Porter’s Differentiation Strategy

 

Another way of achieving a competitive advantage for companies is through differentiation strategy (Porter, 1980).  In strategic marketing and management literature, the differentiation strategy has been based on the premise that improved/innovative outputs will translate into greater demand for the business’s outputs (Buzzell and Gale, 1987). 

 

According to Porter (1980, 1985):

 

“Differentiation provides insulation against competitive rivalry because of brand loyalty . . . The resulting customer loyalty and need for a competitor to overcome the uniqueness create entry barriers.  Differentiation yields high margins with which to deal with supplier power and clearly mitigates buyer power since buyers lack comparable alternatives and are thereby less price sensitive. Finally, the firm that has differentiated itself to achieve customer loyalty should be better positioned vis-à-vis substitutes than its competitors” (Porter, 1985:14 and Porter, 1980:37).

 

 

Differentiation strategy is pursued when a firm seeks ways to be ‘unique’ in its industry along other dimensions that are widely valued by buyers (Hitt et al, 2007; Prajogo, 2007; Akan et al., 2006; Allen & Helms, 2006; Bauer and Colgan, 2001; Hlavacka et al., 2001; Hyatt, 2001; Cross, 1999; Green et al, 1993; Miller & Dess, 1993; Govindarajan & Fisher, 1990; Speed, 1989; Miller, 1986; Porter, 1996, 1980, 1979).  

 

Its aim is to create brand loyalty and price inelasticity, which can increase margins, create entry barriers, and mitigate the power of buyers who lack comparable substitutes (Akan et al, 2006; Hlavacka et al., 2001; Cross, 1999; Speed, 1989; Porter, 1985). 

 

Firms that successfully differentiate themselves are rewarded for their uniqueness on the product characteristics, the delivery system, the quality of service, or the distribution channels with a premium price (Hitt et al., 2007; Prajogo, 2007; Akan et al, 2006; Allen and Helms, 2006; Govindarajan & Fisher, 1990; Porter, 1985, 1980).  The economics inherent in this generic strategy require that the premium exceeds the extra cost incurred in being unique (Hlavacka et al, 2001).  Moreover, The differentiation strategy appeals to a sophisticated or knowledgeable consumer interested in a unique or quality product and willing to pay a higher price (Allen et al, 2007; Akan et al, 2006; Rubach & McGee, 1998; Kling and Smith, 1995).

Thus, the objective of a differentiation strategy is to persuade the market/industry that there is a “distinct gap” between a company’s product and other companies competing against it (White, 2004).  This gap can be based on real or physical differences (such as: size, shape, colour, weight, design, material, and technology embodied) of a product that will create a unique characteristic which will influence a satisfactory number of buyers to purchase it.


The key step in devising a differentiation strategy is to determine what makes a company different from a competitor’s (McCracken, 2002; Reilly, 2002; Berthoff, 2002; Rajecki, 2002; Tuminello, 2002; Surowiecki, 1999; Coyne, 1986).  Factors including market sector quality of work, the size of the firm, the image, graphical reach, involvement in client organisations, product, delivery system, and the marketing approach have been suggested to differentiate a firm (Prajogo, 2007; McCracken, 2002; Davidson, 2001; Murray, 1988; Coyne, 1986).  To be effective, the message of differentiation must reach the clients (McCracken, 2002), as the customer’s perceptions of the company are important (Berthoff, 2002; Troy, 2002; Coyne, 1986).  Van Raaij & Verhallen (1994) suggest bending the customer’s will to match the company’s mission through differentiation.

When using differentiation, firms must be prepared to add a premium to the cost (Hyatt, 2001).  This is not to suggest costs and prices are not considered; only it is not the main focus (Hlavacka et al., 2001).  However, since customers perceive the product or service as unique, they are loyal to the company and willing to pay the higher price for its products (Allen et al, 2007; Prajogo, 2007; Hlavacka et al., 2001; Venu, 2001; Cross, 1999).
Depending on industry characteristics, differentiations may allow for above-average industry pricing policies in the face of greater market demand for the business’s outputs (Porter, 1980 and 1985; Wright, 1987).  Thus, the businesses that can effectively compete with differentiation may be able to outperform their competitors through higher price (Wright et al., 1991). 

A differentiation strategy will be successful when within an industry there are numerous ways to differentiate a product and buyers perceive those changes as value added to their preferences (Hitt et al., 2007; Thompson & Strickland III, 2003).  Moreover, the more diverse buyers’ preferences are the more room for differentiators exist to pursue different approaches to add features to their offerings (Hitt et al., 2007; Thompson & Strickland III, 2003).  Similarly, to maintain customers’ interests differentiators need to invest in product innovations and thus launch a sequence of versions of the updated product (Hitt et al., 2007; Thompson & Strickland III, 2003; Murray, 1988).  Murray (1988) states that a differentiation strategy will be useful only when buyers’ purchasing decisions are based on product attributes other than price. 

 

Last but not least, a differentiation strategy adds cost to those choosing to employ such strategy (Porter, 1985).  Being unique demands a continuous investment and effort to identify unique opportunities.  Thus, a differentiator will choose to purchase higher quality raw materials and inputs, launch an extensive advertising and promotional campaign, continually train its employees to achieve higher standards and quality, and offer an extensive after-sales service support (Grant, 2002; Porter, 1985).  Some forms of differentiation will therefore be more expensive to adopt than others (Porter, 1985). 

 

 

Ways of Achieving a Differentiation Strategy & Uniqueness Drivers

Having defined the dimensions of a differentiation strategy, the researcher now will investigate ways of achieving such a strategy and the uniqueness drivers that relate to it.  Such an examination will provide a robust theoretical background to understand how value activities can be utilised by companies wishing to employ a differentiation strategy.

 

According to Grant (2002) and White (2004) there is a potential for differentiation strategy which exists on the demand side (a market segment which requires a specific need and refers to the technical nature of the product and its physical characteristics define the potential to satisfy customers’ requirements) and on the other hand, on the supply side (is the ability of a company to achieve a differentiation of the product). 


Various other authors have suggested ways of achieving differentiation and their position is quite similar to Porter’s (1985).  The following table shows a number of ways of achieving a differentiation advantage and it can be seen it varies in numerous dimensions.  For instance, Chen (2001) states that a company can achieve differentiation by enhancing product attributes in a way that adds value to buyers.  Such differentiation can be achieved though technology, brand usage, additional features, and unique services (pre and after sales).  In addition, companies need to adopt a ‘dominant design’ and create bonds with their customers through the superiority of their product and services (Chen, 2001).

Similarly, Deise et al (2000) state that companies can gain differentiation by offering better product quality, improved service quality, pricing, and fulfillment time.  Chaffey (2002) adds that differentiation advantage can be achieved when an attribute a product cannot be matched by another competitor’s offering. 


Key Concepts for Achieving a Differentiation Strategy
Key Concept
Author(s)
·           speaking about the product to select panels
·           writing on key topics affecting the company in the association’s magazine or newsletter
·           becoming involved in the community
·           using photos and renderings in brochures
McCracken (2002)
·           creative flair, strong basic research, and product engineering
Porter (1980)
·           offering something the competitor does not or cannot offer
Rajecki (2002)
·           providing e-commerce
·           making access to company information and products both quick and easy
Chakravarthy (2000)
·           being creative when composing the company’s portfolio
Tuminello (2002)
·           training employees with in-depth product and service knowledge
Darrow et al. (2001) Speed (1989)
·           offering improved or innovative products
Helms et al. (1997)
·           offering financial arrangements to customers
Murray (1998)
·           emphasising the company’s state-of-the-art technology, quality service, and unique products/services
Bright (2002)
Hlavacka et al. (2001)
·           Achieving successful differentiation requires clear understanding of customer needs and investments in the capabilities necessary to meet those needs
Kling & Smith (1995)
·           selecting products and services for which there is a strong local need
Darrow et al. (2001)
·           product design
Byrne (2005)
Gilmore (2005)

 

 

Another type of differentiation strategy aims at the continuous improvement of products and processes. In this case, the main concern of the organisation is its intellectual capital and employees are required to become knowledge workers and be involved in planning, quality control, problem identification and problem solving (Snell and Dean, 1994; Youndt et al, 1996).

 

Because of the many aspects provided numerous studies, the following Figure provides a classification of ways of achieving a differentiation strategy.  The categories are: Product Differentiation; Price Differentiation; Brand Differentiation; Promotional Differentiation; and supporting activities to achieve differentiation.

 

Porter (1985) states that there are additional opportunities for differentiating factors when a company focuses on a broad competitive scope.  It is essential for differentiators too achieve high levels of consistency and coordination among value chain activities:

(i)          a company’s ability to serve its customers’ needs anywhere;

(ii)         a single point of purchasing;

(iii)        commonality throughout the product range (product rationalisation) can simplify maintenance;

(iv)        single point for customer service where customers can have access;

(v)         customers can use a company’s products because of compatibility within the range.

 

 

A Classification of Ways for Achieving a Differentiation Advantage

 

 

Similar to my previous post (cost leadership and cost drivers), each value activity is determined by as series of drivers.  In the case of a differentiation strategy, a company needs to identify its uniqueness drivers that will allow them to understand why a value activity is unique (Porter, 1985).  The principal unique drivers for differentiation according to Porter (1985) are: Policy choices, linkages, timing, location, interrelationships, learning, integration, scale, and institutional factors.

 

“Policy Choices” refer to choices a company can take in relation to what activities and how to perform them (Porter, 1985).  Policy choices that provide uniqueness to differentiating companies are: enhanced performance and product features offered to buyers; additional services provided to customer to support the product sold (credit, on time delivery, maintenance and repair); intensity (usability rate) and content of an activity adopted; technology adopted in performing an activity; skill and experience required for employees with purpose to perform an activity); and information employed to perform and activity.

 

“Linkages” refer to uniqueness that can be achieved within a company’s value chain activities.  Creating ‘unique’ features and performance involves the coordination of a company’s activities (Porter, 1985).  For instance, coordination between the sales force and services could potentially to responsive customer needs (Porter, 1985).  Moreover, linkages refer to uniqueness in relation to an effective and efficient coordination with suppliers (Porter, 1985).  Form instance, sharing information with suppliers can lead to the development of additional product or service features and functionality.  According to Porter (1985), there is a third type of linkages: the channel linkages.  Uniqueness can be provided by coordinating with channels in joint selling efforts; educating and training them in various aspects of the business; and subsidising for investments in personnel, facilities and performance.

 

“Timing” relates to a company’s action to adopt and introduce something new and unique to its customers (Porter, 1985).

 

“Location” refers to convenience created for a company’s customers (Porter, 1985).  It may involve an extended network of stores and/or availability of its product/services and spares to a number of locations. 

 

“Interrelationships” between a company’s business units can generate uniqueness of a value activity (Porter, 1985).  For instance, sharing a sales force between two different business units can increase the cross-selling opportunities for an organisation.

 

“Learning”  how to perform and activity better results to the uniqueness of activity (Porter, 1985).  For instance, quality in the manufaturing process may be possible obnly through learning.

 

“Integration” refers to bringing together old and new activities that may create a unique advantage by enabling a company to control and coordinate its activities (Porter, 1985).  Integration could provide more activities as additional sources of differentiation.  For instance, carrying out in-house activities rather than outsourcing them could provide companies with a form of uniqueness compare to its rivals.  Porter (1985) states that integration involves company activities with supplier activities; channel activities; and buyer activities (such as online ordering). 

 

“Scale” refers to the size of an activity that a company could be involved in (Porter, 1985).  Hence, large scale activities performed by a company rather than in a small scale could provide unique advantage. 

 

“Institutional Factors” relate to regulations imposed by governments and can have important effects on a firm's unique advantages (Porter, 1985).  Preferential treatment based on good relations with other institutions (such as government, and trade unions) could provide a uniqueness factor for firms. 

 

 

 We can help you with the analysis of your company's, market's, and competitors' value chains.  Please do not hesitate to contact me at info@antonymichail.com.


Dr. A. Michail


PS the references although are given within the text I have not fully included them


Copyright Dr. Antony Michail. 2011. All Rights Reserved

 

2 comments:

  1. I've written an article on choosing differentiating on quality and the implications for internal and external communications here: http://mbaoutcome.blogspot.com/2012/07/explaining-value-of-quality.html
    I think this would fall under brand in what you have put forward above. Thanks for pulling this together.

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  2. Thanks for posting this! I have a small business that I want to make more competitive with the other businesses in my area. It's very helpful to know new strategies to make my business more successful. I'll try out the differentiation strategy and see how it works out for my business. Thanks for the information!
    http://www.gilbertems.com/gilbert_opa/user_signup.php

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