Differentiation Strategy

The firm that seeks to be unique in its industry in ways that are widely valued by buyers is following a differentiation strategy. It might emphasize high quality, extraordinary service, innovative design, technological capability, or an unusually positive brand image. The attribute chosen must be different from those offered by rivals and significant enough to justify a price premium that exceeds the cost of differentiating. Many firms find at least one attribute that allows them to differentiate themselves from competitors. Ranbaxy (technology), DLF Universal (reliability), HUL (distribution), and Maruti Udyog (service) are a few.

Moser Baer in India uses innovative manufacturing processes to continuously improve production and cost efficiency. Moser Baer is the recognized cost leader in the Optical Media industry with 16 percent of the global market share. It is an OEM supplier of CDs, DVDs, and blue laser discs to all 12 Optical Media manufacturing companies in the world.

The first two strategies sought a competitive advantage in a broad range of industry segments. The focus strategy aims at a cost advantage (cost focus) or differentiation advantage (differentiation focus) in a narrow segment. That is, management will select a segment or group of segments in an industry (e.g. product variety, type of end buyer, distribution channel, or geographical location of buyers) and tailor the strategy to serve them to the exclusion of others. The goal is to exploit a narrow segment of market. Of course whether a focus strategy is feasible depends on the size of a segment and whether it can support the additional cost of focusing. HUL used a cost focus strategy in its Wheel detergent line, which it used to reach the price sensitive customers seeking affordable quality.

Differentiation strategy: The strategy an organization follows when it wants to be unique its industry within a broad market.

Focus strategy: The strategy an organization follows when it wants to establish an advantage in a narrow market segment.

Which strategy management chooses depends on the organization‘s strengths and its competitors’ weaknesses. Management should avoid a position in which it has to slug it out everyday in the industry. Rather, the organization should put its strength where the competition isn’t. Success, then, depends on selecting the right strategy, the one that fits the complete picture of the organizations can gain the most favorable competitive advantage.

What if an organization cannot use one of these three strategies to develop a competitive advantage? Porter uses the term tuck in the middle to describe that situation. Organizations that are stuck in the middle often find it difficult to achieve long term success. When the do it’s usually the result of competing in a highly favorable market or having all their competitors similarly stuck in the middle. Porter notes, too, that successful organizations may get into trouble by reaching beyond their competitive advantage and end up stuck in the middle.

Sustaining a competitive advantage:

Long term success with any one of Porter’s competitive strategies requires that the advantage be sustainable. It must withstand both the actions of competitors and the evolutionary changes in the industry, which are not easy especially in environments as dynamic as the ones organizations face today. Technology changes, so too, do customers’ product preferences. And competitors frequently try to imitate an organization’s success. Managers need to create barriers that make imitation by competitors difficult or reduce the competitive opportunities. The use of patents, copyrights, or trademarks may assists in this effort. In addition, when strong efficiencies come from economies of scale, reducing price to gain volume is a useful tactic. Organizations can also tie up suppliers with exclusive contracts that limit their ability to supply materials to rivals. Or organizations can encourage and lobby for government policies that impose import tariffs that are designed to limit foreign competition. The one thing management cannot do is become complacent. Resting on past successes may be the beginning of serious for the organization. Sustaining a constructive advantage requires constant action by management in order to stay one step ahead of the competition.