When you differentiate the quality of your products, you are able to differentiate the cost as well, another aspect of vertical differentiation. Power Point Set #5: Business Level Strategy: Cost and Differentiation Advantage Business Strategy and Competitive Advantage A business-level strategy is an integrated and coordinated set of commitments and actions designed to provide value to customers and gain a competitive advantage by utilizing core competencies in specific individual product markets. 4. With a product differentiation strategy, though, explaining and demonstrating why your brand is the best option and value is key. This creates more pressure to … Overall, there are pros and cons to differentiating your products. Horizontal differentiation is when products are differentiated according to a specific feature. Cost Leader. From Porter's point of view, strategic management should be interested in building and maintaining a competitive advantage. Marketing is intended to help convey to target customers your brand and your product's unique value proposition. differentiation strategy advantages and disadvantages. Especially in a tough economy, you have to really succeed with more affluent customers if you price your products above what a significant segment of the population can afford. In business strategy, cost leadership is establishing a competitive advantage by having the lowest cost of operation in the industry. Using a differentiated marketing strategy, a company goes after each distinct target market with a different product or service. This broad approach of the generic strategy aligns with Netflix’s intensive growth strategies, which prioritize market penetration. W. L., & Jones, Gareth. In this post I’m going to be focusing on differentiation, but it is important to understand why differentiation is a strategy and how it relates to competitive advantage. Since then, she has worked as a reporter for the Wilbraham-Hampden Times, an editor for Month9Books and Evolved Publishing, editor and has spent the past seven years in marketing and graphic design. Up to four multiple pays for customers because of how they work or how the products perform, but how brands think to people: “If you want to steal share in this crowded market, your brand must recognize that a consumer is a … Differentiation strategies are attractive whenever buyers’ needs and preferences are too diverse to be fully satisfied by a standardized product or service. For example, following the differentiation focus strategy, Betterment – the largest automated investing service – clearly has a strong advantage by focusing on a narrow segment. Higher margins make it easier for you to cover fixed costs and operate a profitable business. Cost Leadership and Differentiation. A cost leadership strategy is where the price may be similar or usually lower than the competition, but costs are certainly lower. Porter asserts that a business model can’t offer the best product or service at the lowest price and maintain a sustainable competitive advantage. Once determined, the strategy is categorized as one of the 5 Generic Competitive Strategies. Here are some of the benefits. B)few rivals are pursuing a similar differentiation approach. He holds a Master of Business Administration from Iowa State University. E.g. 5. In contrast, a company with more than 100 flavors of ice cream can be known for having a flavor for everyone. A Cost Leader is where the company has … Posted October 11th, 2020. 1. A focused cost leadership strategy requires References: [1] Hill, Charles. While it is likely to have a lower market share than a firm following a cost leadership strategy, profits are high due to the perceived product and service differences among customers. The policies to appeal to broad markets can be contrasted with strategies that target a relatively narrower niche of potential customers. See the answer. Focus strategy, a key part of other marketing strategies that include low cost and differentiation strategies, offers the following advantages. Cost leadership is often driven by company efficiency, size, scale, scope and cumulative experience (learning curve). Unique Product. New Product Pricing Vs. Market-Penetration Pricing, BusinessDictionary.com: Product Differentiation, Washington State University: A Definition of Advertising. advantages and disadvantages of differentiation strategy pdf. Product Segmentation, Privacy Notice/Your California Privacy Rights. A company having a better product compared to its competitors can carve out its place in the business community. Businesses looking to build a broad or focused differentiation strategy will need to produce or design extremely unique or distinctive products or services that create increased value for the consumer. The advantage of differentiation is when companies offer better products and services than their competitors. The intent is to preserve the existing product line, continuing with presence Your … Because customers perceive the unique customer service or product features as special, a company following a differentiation strategy is typically less sensitive to price fluctuations than the general market. There are some big advantages to using a differentiation strategy. Houghton Mifflin Company But more important and effective than this is how Nike makes its customers feel. In the case of differentiation, a key advantage is that effective differentiation creates an ability to obtain premium prices from customers ("Executing a Differentiation Strategy" [Image missing in original] ). For a focus strategy to be successful, businesses and brands must actively listen when hearing about the needs and concerns of their targeted demographic. 1. A concern with a product differentiation strategy is the investment you typically have to make to produce or acquire a top-notch product. It can be a struggle to identify true cost leaders in any industry. This enables a firm to enjoy strong profit margins. Broad Differentiation, Mergers, and Acquisitions: Outperform the Competition Timothy Creed Cannon Belhaven University Abstract Throughout the text, Essentials of Strategic Management: The Quest for Competitive Advantage, the authors discuss many different strategies which organizations can implement in an effort to outperform rivals within their respective markets. 2. An advantage of this is that it enables you to capitalize on the price points of all consumers shopping for your product. Question: What Are The Pros And Cons Of A Broad Differentiation Strategy? Broad differentiation, broad cost leadership, and _____ create the three generic strategies identified by Porter. This sustainability becomes a tremendous advantage when economic circumstances take a turn for the worst. A company having a better product compared to its competitors can carve out its place in the business community. Differentiation strategy 1. After comparing, the company creates a list of characteristics its products contain that the competition’s products lack. Not having to compete with commodity products on price leads to higher profit margins. Benefits of creating a differentiation strategy. Here are some of the benefits. By successfully delineating your product's uniqueness, and the benefits of such features, you can make it easy for your customers to perceive the value. Pursuing a differentiation strategy requires a larger financial investment from the company, another weakness. It allows firms to shield themselves from the competition. Up to four multiple pays for customers because of how they work or how the products perform, but how brands think to people: “If you want to steal share in this crowded market, your brand must recognize that a consumer is a … This problem has been solved! Another adv… A product differentiation approach does have some drawbacks, though, relative to other business strategies. DIFFERENTIATION STRATEGY In this paper work we will talk about Differentiation Strategy.In contrast to the cost leadership strategy, implementation of a differentiation strategy means that value is provided to customers through the unique features and characteristics of a company's products rather than by the lowest price. I previously touched upon Michael Porter’s generic cost leadership strategy here. This is part of the reality of target marketing. While an advantage of this is that it allows you to capitalize on a wide range of consumer quality preferences, it also can be a disadvantage. Competitive Strategy is about applying offensive or alternatively defensive actions to create a advantageous position within marketplace, with a purpose to deal with issues effectively with competitive forces in addition to come up with a much better return on investment.. Cost leadership strategy and differentiation strategy share one important characteristic: both are used to attract customers in general. A) Narrow market leadership B) High cost versus low cost C) Focused strategy D) None of these More… Read More This differentiation strategy involves using the characteristics of the product you market to differentiate from your competitors. For example, a red coffee maker is not typically more expensive than a black one. © 2019 www.azcentral.com. An organization employing a strategy that attempts to be “all things to all people” will become stranded in mediocrity (i.e. If a firm has a product that is high in demand the firm can price it higher. The differentiation strategy should not be mistaken for providing unique products simply for the sake of being unique; rather the differentiation should be tied to customer demand or willingness to pay. It allows firms to shield themselves from the competition. Part of vertical differentiation is the range of quality of the products produced. in one or more useful competitive advantages only after competitors’ efforts to duplicate its strategy ... differentiation strategies, and (3) focus strategies. There could be small businesses or involved in a single business or a large, complex and diversified conglomerate with several different businesses. One strength of a differentiation strategy is that it builds on the unique qualities in a product. Excerpt from Essay : Strategy Michael Porter described four types of generic strategies, a matrix with cost leadership and differentiation on one axis, and broad market/niche along the other. These are ordinarily distinct groups that have specialized requirements. At the moment, the business environment is characterized by a high rate of dynamism as a result of technological advancement, coupled with a high rate of globalization. What Internal & External Factors Affect Market ... What Internal & External Factors Affect Market Segmentation? In 2007, department store Dillard’s stopped carrying men’s sportswear made by Nautica because the seafaring theme of Nautica’s brand had lost much of its cache among many men (Kapner, 2007). Copyright 2021 Leaf Group Ltd. / Leaf Group Media, All Rights Reserved. Product differentiation means that your product has one or more distinct attributes that separate it from competitors. But more important and effective than this is how Nike makes its customers feel. A differentiation strategy allows companies to communicate the unique features of their products and create a niche for the product. When a company efficiently differentiates its products, and few essential products stand out, it usually brings out brand loyalty on the consumer’s part. 1. Differentiation in business refers to the act of marketing a particular product or service in a way that makes it stand out against other products or services. Another implication of product differentiation is that very often, it brings brand loyalty into the picture. The corporate strategy in these cases is about the basic direction of the firm as a whole. Here are the possible benefits of creating a differentiation strategy: 1. Differentiation Strategy Prof. (Dr.) Nitin Zaware Prof. (Dr.) Nitin Zaware 1 2. All three generic strategies are designed to achieve distinction relative to a rival. Strategic Management Theory. Similarly, what is cost leadership and differentiation strategy? Kokemuller has additional professional experience in marketing, retail and small business. For some companies, elite services or low prices are emphasized. Using a clear strategic profile as a focused differentiator, Porsche was very successful and very profitable. Economics Web Institute: Product Differentiation, More For Small Business: Product Differentiation Helps You Build Competitive Advantage. Broad Differentiation Strategy. All of these are incredibly necessary internal metrics, however, none of these matter to the customer — This is all great information for the company to have as its control panel, but these metrics have extraordinarily little that matters to customers. It will discuss mergers and acquisitions of The Kroger Company (Bethel University, 2017). What are the pros and cons of a broad differentiation strategy? You do not have to compete on price alone.Since you have distinguished yourself from your competitors the prospective client cannot reduce their choice to the dimension of cost alone. Your target customers in this case are more discerning, and willing to pay extra for better value or top quality. Original Strategy: The strategy employed by Andrew’s management is that of a broad differentiator by maintaining presence in every market segment. Better consumer satisfaction Through adopting the focus strategy, a firm ideally focuses on specific target markets. Horizontal differentiation has similar products that vary in ways that are often superficial and do not impact price or quality. Strategy The Kroger Company uses the broad differentiation strategy. Having low-quality products in your catalog can earn your brand a reputation of poorly made products. There are advantages and disadvantages to differentiating your products, no matter which type of differentiation best suits your company. These three broad types of competitive strategies have also been labeled generic strategies. Consumers of differentiated products are not as sensitive to price changes, therefore, the manufacturers can increase their prices. Product differentiation is economically advantageous to a company. Finding companies that have a sustainable advantage through their differentiation strategy is something that in time can not be copied or imitated. earn… Reduced price competition. It will also reduce the speed to which an organization is able to adapt to changing circumstances. Advantages of Differentiation. It will also discuss competition and strategy from rival company Walmart. Product differentiation occurs on two clear levels: vertical and horizontal. For example, your product line could have various flavors, colors and styles. A broad differentiation strategy is generally not suitable for attaining a competitive advantage when A)buyer needs and preferences are too diverse to be fully satisfied by a standardized product. The approach relies on the company’s business model and value chain, which satisfy customers partly through personalized customizations, such as … By contrast, the differentiation focus and cost focus strategies are adopted in a narrow market or industry. A disadvantage is that you will have higher production costs but not necessarily an increase in revenue from product to product, since they are likely priced the same. Broad Differentiation Strategy is quite unique and brings about many Examples. She also has an extensive background in dance. differentiation advantages can be ... this volume provides a broad coverage of the field and an accessible framework for investigating its subject matter. One customer might prefer red over black, another might choose strawberry over mint. For many decades, Porsche pursued a focused differentiation strategy (see Exhibit 6.2 in Chapter 6). As indicated, a differentiation strategy serves a broad market. Problem 76SAQ from Chapter 5S5.3: What are the pros and cons of a broad differentiation strategy? With a stellar product that demands top dollars, you also don't need to sell as much product to generate high revenue and profits. If a firm has a product that is high in demand the firm can price it higher. By contrast, the differentiation focus and cost focus strategies are adopted in a narrow market or industry. You have greater appeal to your target audience.Since you are different, and presumably better, you make a more appealing choice. Differentiation strategies have several advantages that may help you develop a unique niche within your industry. Let's explore these 3 Small Business Competitive Advantage Strategies; Cost Leadership, Differentiation Strategy and Focus Strategy. You do not have to compete on price alone. The differentiation can be about colors, packaging, shapes, flavors, etc. Michelle Barry graduated from Salve Regina University with a Bachelor of Arts in English. To be successful in using broad-differentiation strategies the firm should have adequate adaptive advantages that would allow it to continuously innovate or be able to leverage economies of scale (that comes with selling to the masses) to create sustainable differentiation. Previous question Next question Expert Answer . Firms that compete on uniqueness and target a broad market are following a differentiation strategy. Research will show whether Kroger uses an offensive or defensive strategic approach to business practices. Loose-Leaf Crafting and Executing Strategy: The Quest for Competitive Advantage: Concepts and Cases (18th Edition) Edit edition. Types of Strategies – Cost Leadership ,Differentiation , Focus. C) good management consists of good strategy and good strategy execution. Two types of differentiation strategy: Broad differentiation strategy: presents a view of differentiation that is far more inclusive because they do not make distinction between the premium price quality segment on the one hand and mid price segment on the other. Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. The strategy of the broad differentiator was the teams choice, because we thought that it would be the most difficult to accomplish, would take the most time, and provide us all with a well rounded learning experience because we would be able to learn how to be successful in both the low and high tech segment with our products instead of just one of the segments. Vertical differentiation refers to products that fall on a scale from best to worst, highest to lowest, impacting the overall functionality of the item. Everything becomes easier when your strategy is narrowly focused on a single market segment. Focused cost leadership is the first of two focus strategies. Differentiation Strategy. The differentiation and cost leadership strategies seek competitive advantage in a broad range of market or industry segments. When vertically differentiating your products, you can have some products of high quality, some of mid-level quality and others of low quality. An advantage of this is that it allows you to cover the preferences and tastes of a wide variety of consumers. Broad Differentiation Strategy is quite unique and brings about many Examples. Each generic strategy offers advantages that firms can potentially leverage to enjoy strong performance, as well as disadvantages that may damage their performance. Competitive Advantage cannot be fully understood by considering an organisation in general. Often the cost of production and distribution is only marginally higher than in a cost leadership strategy; however, perceived quality differences allows the selling price to be set at significantly higher points. A company that produces only chocolate ice cream but is well known for having the highest-quality, and best-tasting chocolate ice cream has its own realm of appeal. An element of horizontal differentiation includes having a variety of products that do not differ in quality or price point. There are several ways an organization can create a differentiation-based competitive advantage for a single product or the company as a whole. Download Solution: Click to Download Solution Solution File Name: Porsche.docx Unzip Password: prestobear.com 1. In this strategy, the company will pursue to gain a competitive advantage by providing unique brand of sensors. Product differentiation is economically advantageous to a company. The big risk when using a differentiation strategy is that customers will not be willing to pay extra to obtain the unique features that a firm is trying to build its strategy around. A) A company can enjoy long-term success with a weak strategy if the execution is strong and aggressive. A Focused Differentiation Strategy Differentiation depends on the right metrics. Cost Leadership. Pros and cons of differentiated instruction. 2. 3. 4. Not only does this broaden your consumer base but, as a result, your revenue as well. Focus the differentiation strategy on the quality and design of your products and gain a competitive advantage in the market without decreasing their price. This strategy is concentrated on a broader segment of the total market. A distinguished, better-quality product also offers greater profit margin opportunities than selling with a low-cost or alternative approach. It helps to build strong relationships within each target market. Cost Leadership. If you succeed, you can make up for these costs in higher revenue, but the downside risks of steep losses are present. A differentiation strategy is where the product or service is either perceived to be, or is, of superior customer value and has a definite price premium. 1. Several examples of firms pursuing a differentiation strategy are illustrate below. Because of this, your marketing, sales and service costs are often higher as well. The company analyzes the specific product and compares it with similar products offered by competitors. C)products of rivals are weakly differentiated. This makes it easier to generate interest and close sales. 1. R. (2007). The differentiation and cost leadership strategies seek competitive advantage in a broad range of market or industry segments. While an advantage of this is that it allows you to capitalize on a wide range of consumer quality preferences, it also can be a disadvantage. Horizontal Differentiation. It is because once a consumer is satisfied with a few pr… 1. Provides economic benefits. What Are The Pros And Cons Of A Broad Differentiation Strategy? Price Segmentation Vs. With multiple price points in products, you can have shoppers of all budgets covered, pulling revenue from competitors. What Does a Low Gross Profit Percentage Mean? Advantages of differentiation strategy. It creates more capital that can be used for growth. Broad differentiation is a kind of differentiation that range from products to services. List of the Advantages of a Focus Strategy 1. There are some big advantages to using a differentiation strategy. Business-level strategy is an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets. At the core, all differentiation strategies attempt to make a product appear distinct. B) The marker of good management is a solid strategy that focuses on customer value above all else. This creates more pressure to stimulate customer demand and to maintain a reasonable sales price to drive revenue and profit. Advantages of Product Differentiation . Ultimately, you nee to take into account your goals for company profits and branding to decide if product differentiation is a beneficial strategy. In the case of differentiation, a key advantage is that effective differentiation creates an ability to obtain premium prices from customers ("Executing a Differentiation Strategy" [Image missing in original]). Since you have distinguished yourself from your competitors the prospective client cannot … Every brand is built on a product (I include services here as well). Additionally, by going for product differentiation rather than a low cost, you effectively eliminate budget-conscious buyers who can't afford your higher prices. All rights reserved. He has been a college marketing professor since 2004. These categories are: Starbucks employs a broad differentiation strategy. How Does Product Differentiation Affect Price Elasticity? And the sales team can use them to demonstrate the product's competitive advantage. The Disadvantages of Differentiated Marketing. Here are some of the benefits for companies using a broad differentiation strategy: Ability to apply premium pricing to products or services deemed by consumers as different This contrasts with a more universal, mass market approach, in which the same product is … With this strategy, the objective is to become the lowest-cost producer in the industry. The differentiation and cost leadership strategies seek competitive advantage in a broad range of market or industry segments. These are the target market (broad or narrow) and competitive advantage (low cost or differentiated). While having a quality product is good, being able to develop and articulate the qualities or features that clearly make one product better than the competition is important to attracting value-oriented consumers. When a price or trade war happens, or there is a downturn in the local economy, it is the companies with the lowest cost of doing business that will have the greatest chance at survival. When vertically differentiating your products, you can have some products of high quality, some of mid-level quality and others of low quality. ADVANTAGES: The differentiation would act as a barrier to the business entrants; The company could set a higher price to suppliers; and; Reducing the bargaining power of the buyer because differentiated products can’t be easily copied. If you do lower your prices to attract cash-strapped buyers, you run the risk of creating a price orientation and devaluing your product over time. A concern with a product differentiation strategy is the investment you typically have to make to produce or acquire a top-notch product.