Differentiation for gaining competitive advantage.

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Sources of Differentiation

Differentiation: A firm differentiates itself from its competitors when it provides something unique that is valuable to buyers beyond simply offering a low price. It is one of the two types of competitive advantage a
firm may possess/hold.

Differentiation allows a firm to command

► a premium price i.e. additional payment of price through by lowering buyers

    cost or enhance buyer performance so that the buyers will be willing to pay

    price.

            ► to sell more of its product at a given price

            ► to gain better buyers loyalties.

It is to be noted that, differentiation not only happen in product or marketing practices but it can arise anywhere in a firm’s value chain i.e. successful differentiation strategies grow out of the coordinated action of all parts of a firm not just the marketing department.

Steps in differentiation:

1.      Determine who the real buyer is. The first step in differentiation is to identify the real buyer. The firm, institution, or household is not the real buyer, but rather one or more specific individuals within the buying entity who will interpret use criteria as well as define signaling criteria.

2.      Identify the buyer’s value chain and the firm’s impact on it. A firm’s direct and indirect impact on it’s buyer value chain will determine the value a firm creates for its buyer through lowering buyers cost or raising buyers performance.     

3.      Determine ranked buyer purchasing criteria. Analysis of the buyer’s value chain provides the foundation for determining buyer purchase criteria. Purchase criteria take two forms such as use criteria (uniqueness in meeting use criteria creates buyer value) and signaling criteria (uniqueness in meeting signaling criteria allows that value to be realized). Purchased criteria must be identified in terms that are operational, and their link to buyer value calculated and ranked.   

4.      Assess the existing and potential sources of uniqueness in a firm’s value chain. Differentiation can stem from uniqueness throughout a firm’ s value chain. A firm must determine which value activities impact each purchase criteria. It must then identify its existing sources of uniqueness relative to competitors, as well as potential new sources of uniqueness.

5.      Identify the cost of existing and potential sources of differentiation. The cost of differentiation is a function of the cost drivers of the activities that lead to it. Some forms of differentiation are not very costly and pursuing them may even lower cost in ways that the firm has overlooked.

6.      Choose the configuration of value activities. A subtle understanding of the relationship between the firm’s and the buyer’s value chain will allow a firm to select a configuration of activities that creates the largest gap between buyer value and the cost of differentiation.  

7.      Test the chosen differentiation strategy for sustainability. Differentiation will not lead to superior performance unless it is sustainable against erosion or imitation. Sustainability grows out of selecting stable sources of buyer value, and differentiating in ways that involves barriers to imitation or where the firm has a sustainable cost advantage in differentiating.

8.      Reduce cost in activities that do not affect the chosen forms of differentiation. A successful differentiator reduces cost aggressively in activities that are unimportant to buyer value.