Question

Why do companies adopt a differentiation strategy? Give an example of a company/companies that has successfully adopted a differentiation strategy.

Answer 1

As defined by Philip Kotler, differentiation can be defined as an asset to design certain meaningful differences to a business offering (products or services) from the offerings of the competitors. Business organizations pursue a differentiation strategy to derive a competitive advantage out of it. Competitive advantage can be termed as a circumstance or a condition, which puts a company in a better, superior, and favorable position in the market. When a company has a competitive advantage, it can outperform the other rival firms. For achieving competitive advantage, a company may pursue a:

1. Cost Leadership Strategy (when a company produces its offering that is sold at a lower cost when compared to the competitors).

2. Focus Strategy (when firms penetrate certain niche and target markets), or

3. Differentiation Strategy (when a firm has services/products different and better than the competitors).

Differentiation is a proven way to achieve a competitive advantage. When a firm offers better value to the customers of a market, they prefer the firm and its offering over the competitors. For instance, a company may offer customers products with better features and hence be preferred by the majority of the customers in a market. However, apart from creating special and unique products or services, a differentiation strategy may also be implemented in other ways. Companies may hire and train more talented people and staff or develop the employees to be its competitive advantage, build a better image of the product or the brand, or may innovate new sales channels to differentiate themselves from the competition.

The relevance of Differentiation Strategies in the Current Business Environment

Differentiation strategies and measures are even more fruitful, relevant, and valuable for the current times. Post liberalization of many different economies of the world, and in the present era of globalization, differentiation may be one of the key measures and strategies through which organizations can sustain themselves and face competition. Competition is at the highest level for the different businesses operating in various segments, as apart from domestic competition, companies from other nations are also free to enter the markets. A differentiation strategy, among other measures to gain competitive advantage, helps a firm be innovative and design and implement the ways and measures through which it can overcome the competition and achieve growth. Inputs of differentiation strategy and the implementation plans of it may be based on:

a. the needs of the customers,
b. competitors,
c. service and product levels,
d. other aspects.

For instance, when a firm can deliver what the majority of customers want, improve the customer journey by introducing certain marketing channels that make the purchase and use process more convenient for the customers, or builds on its reputation in a market, it becomes popular and is widely appreciated. Therefore, firms can be said to pursue differentiation strategies to remain, viable, profitable, sustainable, and to register growth even in the face of stiff competition.

Companies That Have Successfully Adopted A Differentiation Strategy

Oscar Health Insurance: the USA based insurance service provider Oscar Health Insurance makes insurance covers and policies easy-to-understand for the insurance buyers. It presents the policies to the prospective buyers in a simple way so that healthcare does not remain a daunting subject for the layperson. The website of the company also integrates a modern user experience that helps the web surfers and customers easily browse, understand, and learn what they pay for when they buy an insurance policy. Further, the new developments in the website of the company provide for customization of the policies (with inputs from doctors who belong to the insurance network), and online purchase of the policy as well. Customers can build their own plan after fully understanding even the hidden concepts of insurance. Therefore, apart from improving the insurance product by presenting to the customers a customization option, the company has also introduced an improved marketing channel that makes customer journey more enlightening, hassle-free, learned, and convenient. The company has been able to register growth and profits and leads the competition, as it has attained competitive advantage in crucial areas and can differentiate itself from the offerings and approaches of the competitors.

Another example of a company practicing differentiation strategy is Lush, a cosmetic producer. In a market that is ripe with companies that focus on producing their offerings en-masse while not considering the quality of ingredients enough, Lush uses totally vegetarian-ingredients that are never tested on the animals. Hence Lush differentiates itself from the other cosmetic producers through its ethically-sourced ingredients and the products of the company are also handmade. In this case, customers who value the ethical approach of the company and denounce animal cruelty will prefer the vegan products of the brand. Consumers may also have a liking for handmade products, as more individualized attention is given towards their manufacturing and creation.

Answer 2

Cost leadership