Which of these companies is pursuing a differentiation strategy to gain a competitive advantage?

Product differentiation is a marketing strategy that businesses use to distinguish a product from similar offerings on the market. The difference could be something concrete, like speed, power, performance and better service. Or, it could be a more ephemeral quality, such as just being cooler or more stylish than your competitors. For small businesses, a product differentiation strategy may provide a competitive advantage in a market dominated by larger companies.

When a company uses a differentiation strategy that focuses on the cost value of the product versus other similar products on the market, it creates a perceived value among consumers and potential customers. A strategy that focuses on value highlights the cost savings or durability of a product in comparison to other products. The cost savings can revolve around the initial selling price of the product, or focus on longer-term, life cycle costs. An energy-saving product, for example, might save consumers money in the long run, even if they pay a bit more at the front end.

The product differentiation strategy also allows business to compete in areas other than price. For example, a candy business may differentiate its candy from other brands in terms of taste and quality. A car manufacturer may differentiate its line of cars as an image enhancer or status symbol while other companies focus on cost savings. When Elon Musk sent a Tesla car to Mars, he created an indelible image for his brand that certainly set it apart from other, Earth-bound vehicles.

You probably can't afford a marketing plan that involves sending your product into outer space, but even a small businesses can succeed in the non-price competition area. Focus the differentiation strategy on the quality and design of your products and gain a competitive advantage in the market without decreasing their price.

A successful product differentiation strategy creates brand loyalty among customers. The same strategy that gains market share through perceived quality or cost savings may create loyalty from consumers. The company must continue to deliver quality or value to consumers to maintain customer loyalty. In a competitive market, when a product doesn't maintain quality, customers may turn to a competitor.

For a nationally marketed product, brands are often associated with celebrities as a means of creating brand loyalty. But smaller businesses can use this strategy as well, working with locally well-known sports figures, television personalities or other smaller-market celebrities to enhance the value of your brand.

A product differentiation strategy that focuses on the quality and design of the product may create the perception that there's simply no substitute available on the market. For years, Apple did a superb job of convincing buyers that there was no viable alternative to their line of computers, phones and music players. Although competitors may have a similar product, the differentiation strategy focuses on the quality or design differences that other products don't have. The business gains an advantage in the market, as customers view the product as unique.

Examples of Competitive Advantage

Competitive advantages come in many shapes and sizes. They include, but are not limited to, some of the following:

• Access to natural resources not available to competitors
• Highly skilled labor
• Strong brand awareness
• Access to new or proprietary technology
• Price leadership

Components of Competitive Advantage

For a competitive advantage to be established, it is important to know the following:

1. Value Proposition – A company must clearly identify the features or services that make it attractive to customers. It must offer real value in order to generate interest.
2. Target Market – A company must establish its target market to further engrain best practices that will maintain competitiveness.
3. Competitors – A company must define competitors in the marketplace, and research the value they offer; this includes both traditional as well as non-traditional, emerging competition.

To build a competitive advantage, a company must be able to identify its value proposition that will be sought after by the target market, which cannot be replicated by competitors.

Building a Competitive Advantage

Michael Porter, the famous Harvard Business School professor, identified three strategies for establishing a competitive advantage: Cost Leadership, Differentiation, and Focus (which includes both Cost Focus and Differentiation Focus)[1].

1. Cost Leadership

The goal of a cost leadership strategy is to become the lowest cost manufacturer or provider of a good or service. This is achieved by producing goods that are of standard quality for consumers, at a price that is lower and more competitive than other comparable product(s).

Firms employing this strategy will combine low profit margins per unit with large sales volumes to maximize profit. Companies will seek the best alternatives in manufacturing a good or offering a service and advertise this value proposition to make it impossible for competitors to replicate.

2. Differentiation

A differentiation strategy is one that involves developing unique goods or services that are significantly different from competitors. Companies that employ this strategy must consistently invest in R&D to maintain or improve the key product or service features.

By offering a unique product with a totally unique value proposition, businesses can often convince consumers to pay a higher price which results in higher margins.

3. Focus

A focus strategy uses an approach to identifying the needs of a niche market and then developing products to align to the specific need area. The focus strategy has two variants:

• Cost Focus: Lowest-cost producer in a concentrated market segment
• Differentiation Focus: Customized or specific value-add products in a narrow-targeted market segment

Competitive Advantage in the Marketplace

Three notable examples are:

1. Walmart: Walmart excels in a cost leadership strategy. The company offers “Always Low Prices” through economies of scale and the best available prices of a good.
2. Apple: Apple uses a differentiation strategy to appeal to its consumer base. It provides iconic designs, innovative technologies, and, therefore, highly sought-after products; this ensures that consumers are willing to pay a premium for Apple devices. 
3. Whole Foods Market: Whole Foods Market’s advantage relies on a differentiation focus strategy. The company is a leader in the premium grocery market and charges more premium prices because its products are unique. This is appealing to a niche market with higher disposable income.

Importance of Competitive Advantage

A competitive advantage is what sets a business apart from its competitors. It is essential in order for a business to succeed, whether it’s by ensuring higher margins, attracting more customers, or achieving greater brand loyalty among existing customers. 

Higher margins, a better growth profile, and lower customer churn tend to also be very popular among both investors and creditors – making capital more readily available (and cheaper) for firms that are able to maintain a strong competitive advantage among their peers.

Video Explanation of Competitive Advantage

Watch this short video to quickly understand the main concepts covered in this guide, including the definition of competitive advantage and how companies create it using various business strategies.

Other Resources

Thank you for reading CFI’s guide to Competitive Advantage. To keep learning and advancing your career, the following resources will be helpful:

Article Sources

To be a leader in operational excellence a company must provide reliable products or services at competitive prices. Delivery to customers must be streamlined and the company must meet or exceed industry lead times. Organizations that have adopted a strategy of operational excellence boast highly efficient processes built around sophisticated information systems.

The Leaders: Walmart and Amazon

Walmart’s foremost trait is cost efficiency. If a price war were to break out tomorrow, this retail giant could outlast all its competitors. It can, therefore, maintain the lowest prices and attract those customers who base their buying decision primarily on price. Walmart delivers the most value to their customers by offering rock bottom prices.

Timing Matters

Another example of operational excellence is illustrated by one of the major Walmart’s competitors – Amazon. This e-commerce giant combines high-powered software with logistics to provide a timely experience to customers.

How did Amazon achieve such disruptive efficiency? According to Quartz, the answer lies in Amazon’s inventory system that organizes products randomly, rather than in order, while meticulously keeping track of every item in the warehouse. This system allows each item to be simultaneously in several locations across the warehouse, making the product pick-up faster, which, in turn, speeds up the whole shipping process. As a result of their on-demand efficiency, Amazon customers with a Prime Membership can receive a package within two days.

Competitive Edge: Cost- and time-efficient supply chains

Above: Kiva robot operating at Amazon’s warehouse. Source: MarketWatch

Customer Intimacy

Companies that excel at operational excellence run their businesses as lean, mean corporate machines. Those pursuing a strategy of customer intimacy must provide superior value by tailoring products and services to fit unique customer needs. Value-added services like focused marketing and responsive/flexible processes are the hallmarks of this value discipline. The marketing and advertising agency MBLM defines customer intimacy as “a new paradigm that leverages and strengthens the emotional bonds between a person and a brand”.

The Leaders: Apple and Ritz-Carlton Hotels

Each year, MBLM conducts a Brand Intimacy Study that determines the top-ranking brands in this area. To do this, MBLM conducts 6,200 qualitative interviews with consumers across three countries.

The 2019 Report ranked Apple as second on the overall list and number one among tech companies. The key to Apple’s customer loyalty lies in their creation of intimacy and emotional attachment to the brand. According to David Weinberger, “everything from opening up the box of an iPhone to holding it in your hand is a sensory pleasure. From its weight to the texture of its parts to the brilliance of its screen–it’s a multi-sensory pleasure machine engineered to make you bodily happy when you interact with it.” Apple is a great example of why paying attention to product design and user experience is crucial from the early stages of product development.

Above: MBLM’s Top Ranked Companies of 2019 Brand Intimacy Study. Resource: MBLM

Personalization is Key

Ritz-Carlton Hotels was identified as a customer intimacy leader. The hotel chain has emerged as the industry standard for personalization in hospitality. Ritz-Carlton has built a database of customers and every time a customer stays at the hotel, that information is accessed to establish their needs. The hotel then responds accordingly, whether by leaving fruit instead of chocolates in the room; or placing the telephone on the other side of the bed for left-handed guests. The hotel is aware and attentive to client needs.

Relationship vs. Account Managers

Paul Hunt, president of Pricing Solutions, cites the example of a bank client that has “relationship managers” instead of account managers. “They are in the customers’ operations all the time, making sure the bank responds to customer needs,” he says. “They almost function as advocates for the customer.” The payoff is long-term customer relationships and low employee turnover. The differentiation strategy for the business is to focus on creating an intimate, long-lasting, profitable relationship.

Competitive Edge: Customer Retention and Loyalty

Product Leadership

This is arguably the hardest value discipline in which to excel. Companies in this category lead the pack when it comes to introducing new products, even at the expense of cannibalizing their own offerings. They are fearless innovators who are always first to market.

The differentiation strategy of product leaders is to deliver superior value through leading-edge products that enhance customer benefits. Product leaders do not have the lowest-cost operations because their customers are not as price-sensitive. Their priority is to deliver the best new product, at any cost.

“The differentiation strategy of product leaders is to deliver superior value through leading-edge products that enhance customer benefit.”

The Leaders: 3M and Vistakon

A global leader in innovation, 3M started out as a modest mining company that now produces over 55,000 products. In times of rising AI, big data, IoT and other industry disruption, the company stays ahead by prioritizing investment in R&D. According to Forbes, the company has R&D laboratories with 8,300 researches in 36 countries. The previous CEO of 3M, Inge Thulin, said that the third of the products they sold in 2013 came from products created in the previous five years.

Seize the Moment

Product leaders are not averse to risk. Johnson & Johnson’s Vistakon Inc. demonstrated the value of taking risks when it took a chance on unproven optical technology. When company executives were led to an inexpensive method of manufacturing contact lenses they seized the opportunity. They immediately bought the rights to the technology from a Danish ophthalmologist. A team was assembled, and a facility was set up quickly. Manufacturing of the lens, called Acuvue, started immediately. This speed to market is Vistakon’s differentiation strategy. It has pushed the company to continue pursuing new technologies that might even render their own current lenses obsolete.

Competitive Edge: Customers with Less Price Tolerance

Find your Niche

Identifying the value discipline your company should pursue takes strategic planning and sometimes a great deal of introspection. One client of ours thought they should be a product leader, however, through the planning process, it was determined that their real strength was customer intimacy. While its products had to be competitive, their differentiation strategy needed to focus on customer intimacy.

In whatever value discipline your organization pursues, you must continually re-evaluate, refine, and even reinvent your differentiation strategy. As HBR pointed out, the operating model that elevates a company to value leadership is superior and worth exploiting only until a better one comes along.