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Differentiation Strategy and Impact On Business
Differentiation Strategy and Impact On Business
Abstract:
Differentiation strategies are based on providing buyers with something that is
different or unique, that makes the company’s product or service distinct from that of
its rivals. The study aimed at discussing the impact differentiation strategy has on
business using empirical studies. The study is grouped on four sections which are:
introduction, literature review, conceptual framework, and conclusion. The study
concludes that there exist significance relationship between differentiation strategy
and business performance. It implies that organization irrespective of industry must
pay greater attention to the products or services they offer to their esteemed
customers’ in terms of quality, design, innovations, and unique features. Based on the
descriptive nature of the study, a conceptual model was developed that will guide
further studies that might be empirical in nature.
1. Introduction
The victory of APC as political party in Nigeria in the 2015 general election was as
a result of the strategy pursued. The slogan ‘change’ was adopted in creating a
different ideology in the political history of Nigerian which resulted to a huge loss
to the PDP’ making them challengers’ both in the upper and lower house. In USA,
Bill Clinton used a simple strategy expressed in four words ‘It's the economy, stupid’
in defeating George Bush.
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Strategic Journal of Business and Social Science (SJBSS) Volume 1, Dec 2018
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In the world of business, one could ask why some organizations always seem to beat
their competition, the answer to the question is based on a thoughtful strategy. The
competitiveness of an organization to a large extent depends on the choice of generic
strategies pursued at any given time (differentiation, cost leadership, & Niche).
Looking at the nature of environmental dynamism of business, maintaining a
sustained competitive advantage entails an organization developing a core
competency which will enable it in differentiating its products/services in terms of
processes, quality and packaging, advertising, and distribution channels with that of
its competitors. For instance, “Mangero’ table water is among the bestselling table
water in Owerri, Imo State. This is because, the company was able to differentiation
its product with beautiful design. Again, Tummy-Tummy Noodles was able to gain
a substantial share in the food industry by adding vegetable as an additional spices
in its noodle thereby differentiating itself from other brands of noodles in the market.
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thirst quenching etc). Pepsi had to find a way to make people think different of what
they were used to. Making Coke look old was solution they found (Now It's Pepsi
for Those Who Think Young, Come Alive! You're in the Pepsi Generation, The
Choice of a New Generation, A Generation Ahead, Be Young, Have Fun, Drink
Pepsi etc) (Paulo, 2009)). The above slogans were used by Coca- Cola and Pepsi in
differentiating their products in price, quality, packing, and other features making
them leaders and challengers in the soft drink industry.
The study aimed at discussing the impact differentiation strategy has on business
using empirical studies. The section discussed the concept of differentiation strategy,
building differentiation base advantage followed by theoretical and empirical
review. Next is the conceptual framework that will guide further studies and
conclusion.
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Strategic Journal of Business and Social Science (SJBSS) Volume 1, Dec 2018
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all brand difference are worthwhile or meaningful to the customers (Porter (1980),
Aaker, (1984 cited in Kotler, (2000)). The challenge is to establish a difference that
is relevant to customers. An organization is also faced with a challenge of how many
differences to promote (Aaker, 1984 cited in Tom, 2008) thus helping an
organization to avoid the risks of over-positioning, under-positioning, confused
positioning and doubtful positioning. Furthermore, the success of a differentiation
strategy lies in adopting a differentiation that is important to customers, distinctive,
superior, affordable and profitable.
Differentiation is one of Porter’s key business strategies (Reilly, 2002). When using
this strategy, a company focuses its efforts on providing a unique product or service
(Hyatt, 2001). Since, the product or service is unique, this strategy provides high
customer loyalty (Hlavacka et al., 2001). Product differentiation fulfills a customer
need and involves tailoring the product or service to the customer. This allows
organizations to charge a premium price to capture market share. The differentiation
strategy is effectively implemented when the business provides unique or superior
value to the customer through product quality, features, or after-sale support. Firms
following a differentiation strategy can charge a higher price for their products based
on the product characteristics, the delivery system, the quality of service, or the
distribution channels. The quality may be real or perceived based on fashion, brand
name, or image. The differentiation strategy appeals to a sophisticated or
knowledgeable consumer interested in a unique or quality product and willing to pay
a higher price.
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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 (Hlavacka et al., 2001). Some key concepts for
establishing differentiation include: speaking about the product to select panels
(McCracken, 2002), writing on key topics affecting the company in the association's
magazine or newsletter (McCracken, 2002), becoming involved in the community
(McCracken. 2002), being creative when composing the company's portfolio
(Tuminello. 2002), offering something the competitor does not or cannot offer
(Rajecki, 2002), adding flair and drama to the store layout (Differentiation will be
key, 2002), providing e-commerce (Chakravarthy. 2000), making access to company
information and products both quick and easy (Chakravarthy, 2000), using company
size as an advantage (Darrow et al., 2001), training employees with in- depth product
and service knowledge (Darrow et al., 2001), offering improved or innovative
products (Helms et al., 1997 in Tom, 2008), emphasizing the company's state-of-
the-art technology, quality service, and unique products/services (Hlavacka et al.,
2001; Bright. 2002), using photos and renderings in brochures (McCracken, 2002),
and selecting products and services for which there is a strong local need (Darrow et
al., 2001).
Examples of companies that have successfully pursued differentiation strategies
include Mercedes, Toyota, Honda, and BMW in automobiles, Heineken, Indomie
Noodles, Tummy-Tummy Noodles, Coca-Cola, Zenith Bank Plc etc.
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Strategic Journal of Business and Social Science (SJBSS) Volume 1, Dec 2018
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According Jeff (2009), buyer value can be increased or made more distinctive
through several approaches, including (1) lowering the buyer’s cost of using the
product, (2) increasing buyer satisfaction with the product, and (3) modifying the
buyer’s perception of value. Of course, these three approaches to increasing buyer
value are not mutually exclusive; a distinctive product or service that lowers buyer’s
direct costs can certainly increase their level of satisfaction as well. Nevertheless,
increasing buyer value on any dimension usually means a need to reconfigure or to
improve other activities within the firm’s value chain (Jeff, 2009).
Among the advantages of differentiation is that it enables an organization in
generating customer loyalty, higher prices increasing market share, and reducing the
threat of possible entrant in an industry. On the basis of increasing market share, any
differentiation strategies based on high quality may, up to a point, actually increase
the potential market share that a firm can gain (Jeff, 2009). One landmark study
noted, in fact, that competitive strategies based on high product quality actually
increased market share resulted in significantly increased profitability. Product
quality often leads to higher reputation and demand that translate into higher market
share. Finally, differentiation processes substantial loyalty barriers that firms
contemplating entry must overcome. Highly distinctive or unique products make it
difficult for new entrants to compete with the reputation and skills that existing firms
already possess (Jeff, 2009). For example the Nigerian Noodl’s industry has
experienced several series of liquidation (Dangota noodles and Mimee Noodles)
based on differentiation on quality. Dangota and Mimee noodles liquidated because
they unable to compete based on quality.
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Strategic Journal of Business and Social Science (SJBSS) Volume 1, Dec 2018
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Furthermore, Price premiums may become difficult to justify as customers gain more
knowledge about the product. The comparatively high cost structure of a firm
practicing differentiation could become a real weakness when lower-cost product
imitations or substitutes hit the market (Jeff 2009). For example, in 2017, Coca-Cola
Nigeria increased the price of its 60cl plastic bottle form N100 to N150 while Pepsi
maintained the price of its 50cl to remain at N100. Customers who were price
sensitive brand switched from Coco to Pepsi resulting to huge loss of sales and
market share for Coca-Cola. In responding to the above threat, Coca-Cola lunched
35cl at N100 to compete with Pepsi’s 50cl being sold at N100. Still at that, majority
of people still prefer Pepsi because of they have gained more knowledge about
product quality and price.
More also, differentiation also leaves a firm vulnerable to the eventual
“commoditization “of its product, service offering. Or value concept when new
competitors enter the market or when customers become more knowledgeable about
what is available (Jeff, 2009). Over time, firms that are unable to sustain their initial
differentiation-based lead with future product or service innovations will find
themselves at a significant, if not dangerous, cost disadvantage when large numbers
of customers eventually gravitate to those forms that can produce a similar product
or service at lower cost. Finally firms also face risks of overdoing differentiation that
may overtaxes or overextend the firm’s resources. For example Nissan Motor of
Japan during the past decade became so obsessed with finding new ways to
differentiate its cars that it produced more than thirty types of steering wheels for its
line of cars and a broad line of engine, all of which eventually confused customers
and made manufacturing costly. Nissan recently announced a sharp reduction in the
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number of steering wheel sizes, optional accessories, and other features in its cars to
lower its operating cost. In 2000, Nissan reduced the number of core automobile
platforms to seven in order to reduce the high cost of overlap and design. Excessive
differentiation can seriously erode the competitive advantage and profitability of
firms as rising operating costs eat into price premiums that customers are willing to
pay (Jeff, 2009).
2.2 Theorizing Differentiation Strategy as source of Competitive Advantage
In order to understand the concept differentiation strategy as source of competitive
advantage, the Resource-Base View (RBV) Theory and the Capability Theory was
reviewed.
The resource-based view theory has defined firm resources as all assets, capabilities,
organizational processes, firm attributes, information, knowledge controlled by a
firm (Barney, 1991cited in Joy, Oluwole, and Ibidunni, 2013). The theory explains
the strategic position a firm would be able to maintain when its resources cannot be
duplicated by a current or potential competitor. Similarly, the theory states that for
resource and capability to give a firm competitive edge, it must be rare, valuable,
unable to be imitated, with no substitute, and not transferable.
The resource based theory believes that an organization’s resources are diverse in
nature and not completely/freely movable which has led to differences among
organizations. Put differently, the heterogeneity of resources has led to business
heterogeneity. Since the resources are not completely mobile, the heterogeneity
among organizations is bound to exist for a long time. If an organization with scarce
resources is able to create value and its resources either cannot be imitated by its
competitors, or easily replaced by other resources, then such an organization has
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Strategic Journal of Business and Social Science (SJBSS) Volume 1, Dec 2018
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Tom (2008) carried out a descriptive survey with the objective of determining the
relationship between differentiation strategy and competitive advantage using radio
stations in Nairobi as a case study. A questionnaire was used to collect data which
was administered using drop and pick method to the management of various radio
stations. Data was analyzed using descriptive statistics and correlation. The study
found out that there is a relationship between differentiation strategy chosen by the
radio stations and competitive advantage.
In another study by Hashem, Hamid, and Samira (2012) on the Effects of Cost
Leadership Strategy and Product Differentiation Strategy on the Performance of
Firms. The study collected data from 45 firms in the Tehran Security Exchange
(TSE) during 2003-2010. The results indicated a positive relationships between
leverage; cost leadership strategy and dividend payout with performance. The results
also suggested that there were positive relationships between leverage and firm's size
with performance in the firms with product differentiation strategy, but the relation
between product differentiation strategy and dividend payout with performance was
negative.
Similarly, Enida, Vasilika, & Amali (2015) investigated the impact of generic
competitive strategies on organizational performance. The data was collected using
questionnaires and analyzed using ANOVA statistical model. The study found
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Strategic Journal of Business and Social Science (SJBSS) Volume 1, Dec 2018
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hypotheses that, when the focus and differentiation strategies are established,
performance is higher than for other firms.
Finally, Joy, Oluwole, and Ibidunni (2013) whose study on product differentiation:
a tool of competitive advantage and optimal organizational performance found a
significant positive relationship between product differentiation and organizational
performance. Based on the above empirical review, we can conclude, that there is a
positive relationship between differentiation and business performance.
3. Conceptual Framework
This study developed a conceptual model that will guide further studies
Differentiation Organizational
Strategies Performance
Product Innovation
Market Share
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4. Conclusion
Maintaining sustained competitive advantage in any given industry entails adopting
the generic competitive strategies of which differentiation is among them. In
building differentiation advantage, an organization must ensure that its cost structure
is control, product/services is of quality, design is enticing, and finally, innovation
should be on continual basis so as to enable the organization to stay ahead of
competition.
In conclusion, from the empirical review, it can be established that there exist
significance relationship between differentiation strategy and business performance.
It implies that organization irrespective of industry must pay greater attention to the
products or services they offer to their esteemed customers’ in terms of quality,
design, innovations, and unique features. Based on the descriptive nature of the
study, a conceptual model was developed that will guide further studies that might
be empirical in nature.
References
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Strategic Journal of Business and Social Science (SJBSS) Volume 1, Dec 2018
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Website: www.sj-bss.com Email: editor@sj-bss.com
Paulo Gabriel (2009) Branding: Slogan Wars Between Coke and Pepsi
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