Differentation strategies and its use by organizations

Differentation strategies and its use by organizations An organization that adopts a differentiation strategy seeks to distinguish itself from competitors through the quality of its products or services. Organizations that successfully implement a differentiation strategy are able to charge more than competitors because customers are willing to pay more to obtain the extra value they perceive. For example in case of Rolex they pursue a differentiation strategy, Rolex watches are handmade precious metals like gold or platinum and stainless steel and are subject to strenuous tests of quality and reliability. The firms reputation enables it to charge thousands of dollars for its watches. (à ¢Ã¢â€š ¬Ã‚ ¦..) Firms use differentiation strategy to achieve a competitive advantage by providing unique products and these products attributes high quality and innovations. Differentiation is not just limited to the product but it also covers the delivery system and many other factors. Firms provide additional services to its customers with these differentiation characteristics which brings more profit with a premium price. Porter (1985), further suggests that these two generic strategies are fundamentally contradictory to each other and its important for the business to choose one of them. Cost leader can only gain the high performance if the business offer a satisfactory level of value to its customers which fulfilling the demand of their customers. Similarly differentiation strategy will only be successfully if the premium price of the product charged to customers characterized with some valuable features and customers are satisfied with that (Porter, 1985). There are many factors which results in differentiation. some of them are, To have a competitive edge on its rivals. To facilitates the entry restrictions for newcomers by building a new product To minimize the threats from its substitutes. To create a differentiation advantage  [1]   Different areas of differentiation While Porter bases his work on manufacturer, Walters Knee (1989) suggest a similar conceptual model for retailers with productivity led (e.g. effective cost management and economies of scales) and marketing led differentiation (e.g. product range, range characteristics or customer services). This model is similar to Porters generic strategies. Only one empirical study focus on differentiation analyses within the retailing. Morschett, Swoboda Schramm-Klein (2006) surveyed managers of food retailers and customers in Germany, Switzerland and Austria. Hypermarkets, supermarket, convenience stores, discounters and other were analyzed based on a pool of items derived by marketing mix elements. It provides evidence of three differentiation strategies: Price, quality (goods and services) and convenience. Reilly (2002) suggests that differentiation is one the key business strategy of Porter. Bauer and Colgan (2001) said that when a company use differentiation strategy, it focus on providing a product or service with unique features. Product differentiation satisfies the specific needs of customer and it allows the company to charge a premium price which helps the organization to capture the market share. The differentiation strategy only gets implemented effectively if the business provides product of superior quality and after sale support. Organizations charge higher prices to its customers when they follow the differentiation strategy based on the product features, their customer service and the delivery system business use. The quality it offers to its customer can be real or distinguished based on the fashion or brand name. The differentiation strategy fulfills the specific or complicated customers interest in a unique and higher quality product and for which he is ready to pay a higher price. When organization use the differentiation strategy then it must be ready to add a premium to the cost but it is not to recommend that costs and prices are not be considered but is not the main focus of the organization. However as the customers likes the product because of its uniqueness and higher quality so they become loyal to the business and do not mind in paying the higher price for the products (Hlavacka et al., 2001) Sources of Differentiation Its not only the low prices of products that can create the differentiation of company from other but offering a unique product to its customer can create a differentiation to its competitors. That unique product should be more valuable to its customers. Differentiation also happened that how a company perform its function and what impacts does it have on its buyers. For example differentiation enables the company to meets the demands of its customers anywhere. It should have uniqueness and must have superior quality of its product as compared to its competitors. Factors/ Drivers for Differentiation Location- This is a very important for an organization to have a uniqueness in respect to its competitors. If the organization have its branch at a location which is easily accessible to its customers as compared to the others companys stores then the store will defiantly will have a competitive edge on the others organizations. Integration- An organization will be considered to have uniqueness its level of integration is high, its mean its level of coordination of value activities is high then it will create differentiation. Timing- An organization can effectively adopt a differentiation strategy if its timing of enchasing the opportunities is well on time. It will create uniqueness in the organization. Interrelationships- Customers can be offered better services by using effectively the different activities in the company. Scale- If the goods are produced at a small scale then the uniqueness of the products will be lost over a long period of time. Larger the scale of goods and services then there will more uniqueness. Differentiation of the organization depends on the volume of uniqueness. Learning- In order to perform well in the market a continuous learning process should be adopted. Institutional factors- If the management will have good relation with its staff that mean company will be having a good impact on its sale. This will also create uniqueness. Waitrose Quality Differentiation Strategy Waitrose has a differentiation strategy of quality product and services to its customers. It has a strategy in providing quality goods which are unique in the market to customers which helps Waitrose to differentiate itself with its competitors. Waitrose also pays too much attention in providing the goods with its own brand name and its specifically target a elite class of the market who dont care paying little bit much for best quality product. Focus Strategy A firm pursuing focus strategy concentrates on a specific regional markets, product line, or group of buyers. This strategy may have either a differentiation focus, whereby the firms differentiate its products in the focus market, or an overall cost leadership focus, whereby the firm manufactures and sell its products at a low cost in a focus market  [2]   Focus strategy is different from other strategies of a business as it remains a segment based and has a comparatively narrow scope in any business. In the focus strategy a organization target a specific segment of the market (Porter, 1979 pp.137-140). So what kind of market to be targeted, McCracken (2002), suggests that a organization can select a specific group of customers, a specific range of product, specific areas or some specific services for the customers. For example some European firm specifically concentrates on the European markets for its products. Aims of adopting a Focus strategy according to Porter (1980), is to achieve a narrow competitive advantage in the market. Focus aims is to concentrate on a niche market with its product that has been ignored by other larger competitors in the market. A specific geography, buyers purchasing behavior, different ethnic peoples demand and product features all makes niches for a organization. David (2000), Focus strategy of a organization can only be successful if the target segment have the potential to make good growth and it does not carry any importance to other competitors. Market penetration and market development can make an important focus strategy. Larger or medium organization use focus strategies but only with the combination of differentiation and cost leadership strategies in some segment of the market. The successfulness of the focus strategies depend only if the people have some specific demands and when there is not competition for other rivals.(David, 2000) Organization which adopts focus strategy in the business concentrates more on niche market and by understanding the dynamics of that particular market and work on the particular needs of the market and then try to produce unique product which fulfill the needs of that particular market. As that organization serves well to their customers in uniqueness, so they create a brand name in the mind of the people and create loyalty brand amongst the customers as well. This makes that particular market segment less attractive to its competitors. As with broad market strategies, it will be essential to decide whether organization pursue Cost leadership strategy or Differentiation strategy once a company have selected a focus strategy as a main approach. Firms that manage to adopt a focus strategy are able to tailor a large number of product developments strengths to relatively narrow market segment that they know very well. Focus strategy has two variants, which are; Cost focus is a variant where the organization looks for a cost advantage in a target segment. This is niche low cost strategy where the organization gets cost advantage in the focusers target segment. According to Porters Cost focus exploits differences in behavior in some segments Differentiation focus is where an organization looks for differentiation in the target segment. In this strategy the organization offers to its customers something different to its customers from rivals. Following are the situations where a focus strategy is efficient; Market segment has to be large enough to be profitable; more customers will bring more profit for the organization. Market segment has good growth potentials. High costs are difficult for the rivals to fulfill the demands of the niche. Focuser has to be able to choose from different segment of the market  [3]   Tesco Express Stores Tesco express stores are neighbor hood convenience shops, stocking mainly food with an emphasis on higher margin products alongside everyday essentials. These are found in busy city centers and small shopping mall in residential areas and on petrol station forecourts. There are more than 700 stores all over UK. Tesco Express is gaining a competitive edge in the small scale grocery market as it is providing additional gasoline facility as well. Cost Leadership Strategy A strategy in which an organization attempt to gain a competitive advantage by reducing its cost below the costs of competing firm. By keeping costs low, the organization is able to sell its products at low prices and still make a profit. Timex uses an overall cost leadership strategy. For decades, this firm has specialized in manufacturing relatively simple low cost watches for the mass market. The prices of the Timex watches starting around 39.95 dollars are low because company has an efficient high volume manufacturing capacity.  [4]   The firms operating in this highly competitive are always desires to be more and more successful. To stay in this competitive environment the company should have an competitive edge on its rivals. In order to have a competitive edge on its rivals the company should be selling its goods to its customers at lowest price with best quality as compared to its competitors. Porter (1980), suggest that in order to achieve the competitive advantage there are fundamentally two different approaches and those two approaches are cost leadership and differentiation strategies. In cost leadership strategy the business look for gaining the above average sale over its competitors with reducing the prices of all the elements of activities. To achieve the cost advantage of this nature, the organizations will employ the considerable efforts to reduce the cost of operating and production and will try hard to use all the available resources to their maximum level, including increasing the utilization of R D and advertising.(Porter, 1980) According to Malburg (2000), there is another strategy of Porters generic strategies which is cost leadership strategy. This strategy is about achieving a competitive advantage in the market by reducing the prices of products. In order to have a competitive advantage, business must focus on the low cost leadership strategy, low cost production and labor which committed to the low cost strategy. The business must be ready to stop all the production activities in which they dont have any cost advantage and must outsourcing all the operations to other businesses which have the cost advantage in the market. He further suggest that there are many areas in which cost leadership can be attained such as production on large scale, mass distribution, innovation of technology, improved product design, access to the raw materials and full utilization of available resources. Porter (1985), purports that only one business in a market can be the cost leader. Porter (1985), stressed there is incompatibility in between cost leadership and differentiation strategy, for instance he believe that differentiation is costly as compared to differentiation. He also used the sentence struck in the middle to put more stress that by combining the cost leadership and differentiation strategy will not results into a prolong competitive advantage. But Hill (1988) and Miller (1992), argued that that it is not only possible to combine both strategies but the combination of these two strategies will produce a competitive advantage for the business. Businesses which adopt differentiation strategy target a specific segment of the market and this strategy also has a broad scope. In the both lower cost strategy and differentiation strategy the businesses concentrates on larger segment of the market. An organization which adopt the lowest cost strategy or differentiation strategy that has a aim to focus on one target segment of the market or few defined segments of the market carry out focus strategy. There are two parts of the focus strategy one is lowest costs focus and the other one is differentiation focus7. (Bas P. Singer, 2007) Product Portfolio Strategy, BCG Matrix The notion of portfolio exists in many areas of life, not just for products. A broad portfolio means that business has a presence in a wide range of products and market sectors. A narrow portfolio implies that the organization operates in only a few or even in one product or market sector. A broad portfolio offers the advantage of robustness in that a downturn in one market will not threaten the whole company. The Boston consulting group matrix offers a way of examining and making a sense of a companys portfolio of product and market interests. It is a way of examining a whole product range to see a companys product as a collection of items in similar way that a holder of shares in several companies might the consider the decision on what to do with the shares. One of looking at the products in a portfolio is to considers each product in its position in the product life cycle and aims to have a balance of products in each stage. A more sophisticated approach is based on the idea that the market share in mature markets is highly correlated with profitability and that is relatively less expensive and less risky to attempt to win a share in the growth stage of the market when there will be many new customers making their first purchase. This is the approach taken by BCG matrix. It is use to analyze the product range with a view to aiding decision on how the products should be treated in an internal strategic analysis. BCG Growth Share Matrix BCG, it is a management tool which helps for four distinct purposes. Product portfolio can be classified into four business types by using BCG matrix based on Stars, Cash Cows, Question Marks and Dogs. In order to determine that what priorities can be given to a companys product portfolio. It can also be use to classify an organization product portfolio according to that how much cash is generation and how much is usage and it helps the management to adopt different available strategies to handle different product lines. Companies like Apple, Semen, Nokia, Sony, Samsung are engaged in diversify the product lines7. According to Boston consulting there are five different types of businesses which require the cash flow in different ratios. First types of businesses require more cash than they generate the cash and these types of businesses are very common. The second type require less cash to invest in but these businesses generate more cash than actually invested in and these are very few in the market. The third types of businesses is self sufficient in cash flow and with the passage of time it generate large amount of cash and the fourth type generate less cash but also requires less cash to invest in. The fifth one is stays in unstable condition. Figure 1: Stars: Stars are the leaders in the high growth market. These products generates large amount of cash but also requires a large amount of money to invest in as well. As time passes on the Stars becomes Cash Cows if these maintain there financial position but if they become unable to maintain their positions in the market, they becomes Dogs. Cash Cow: Cash cows are the products that require low investment but these products generate high amount of cash. These are the market leaders in the low growth market. the cash cows funds themselves for their own growth. They supply the investment funds for other products. These help to justify the debt capacity for the whole company. Dogs: Dogs often have a unsecure future are they are the drainer on the company as they generate very low amount of cash as they have a low market share in a high growth market. Question Marks: Question marks have not achieved a dominant position in the market hence they produce low amount of cash. They require a lot of cash because of the growth market conditions. Tesco has a very good portfolio in the market. Tesco is considered as Cash Cows in the market as it has a fine record of distributing the fine and quality goods and services to its customers. At the same time it is also considered as Stars because they are investing and making a lot of efforts to its customers in creating awareness about the e-commerce and retailing. Many of Tesco stores stocks more than 40000 product lines and express sores stock more than 2000 product line which helps the customers to choose from different product lines and according to their financial positions. Waitrose on the other hands have a different Portfolio as it has a different strategy as compare to Tesco. Waitrose use quality differentiation strategy and concentrate on specific portion of the market and offers them high quality products at a high prices because of this it is not attracting a large number of customers as compared to the Tesco. So this thing makes most of the products of the Waitrose Dogs of the market. Market Growth Strategy, Ansoff Matrix: Ansoff matrix is a strategic tool use to measure or define the strategic future direction of the business. The model categorizes the options into four generic alternatives to simplify the process. Market penetration: existing market/existing product Product development: existing market/existing product Market development: new market/existing market The Ansoff Matrix is used with the strategic objective to determine the future direction of the business. A company might be faced with declining sales of its products in the domestic market and will use the Ansoff Matrix to evaluate the four generic alternatives for the future. e.g company would evaluate strategies to penetrate the existing market through pricing or increased brand loyalty. Another option is to develop the product or change the design, increase the length of the product life cycle and increase the sales. A third option is to export the existing product into other countries or finally stop and completely diversify with new products into new markets.(Diana, 2009) Figure 2: Ansoff Matrix model Market Penetration Ansoff matrix explains that a business attempts to penetrate in a market by using its existing products. Tesco has a history which indicates that it always penetrate in a market with its existing products. It always get benefited from its customers to penetrate into a market. In order to achieve its goals Tesco always uses its strategy in three ways. Tesco attract customers from its competitors then it provides its customers good quality product and then Tesco retains customers as customers feels that it is best provider of goods and services. And thirdly it attract more non user of its products and services by advertising and other promotional strategies. Market Penetration is very important for the Tesco as retaining customers are more important for the Tesco than attracting the new ones. Tesco international expansion strategy has responded to meet the maximum needs of its customers. It is hard to enter into a new country market so Tesco had a strategy to join the local businesses by joint ventures. So this helps Tesco to know that market that what are the demands of the people, their purchasing behavior to foreign goods. Product Development Product development is another strategic approach in which new product has been introduced in the market. Tesco always work on the product development by introducing new products in the market in order to satisfy the needs of the customers. Tesco always maximize its profitability by introducing this strategy into the market. Tesco has produce many products and as a market retailer it distribute into the market. Brand loyalty is very important for the Tesco to develop new product. As Tesco has a good reputation of its brand so it does not have to do more advertising in order to attract more customer to buy any new product. Brand loyalty must be conserved in pricing, quality and uniqueness. Market Development: Market Development happened when a company moves into different countries with its existing products. This strategy is used to find new international markets. Tesco has developed many stores in countries like China, Poland, Japan, Indonesia, Malaysia, Slovakia, South Korea, Turkey and United States. For penetrating into international market, Tesco has adopted a joint venture strategy which helps the company to control its cost and help to know the market. Diversification Tesco is not only sticking to the food items but it also maximizing its profit by selling non food items. Tesco has introduced its own mortgage services, banking and credit card services. It has started to sell the mobiles phones and many other electronic products. The other diversification seen in Tesco is fuel. Tesco has also entered into bio fuel and diesel and bio-diesel and investing more in green energy resources which will help to improve its image as compared to other fuel supplying companies like Shell. B.P8.