Differentiation strategyand impact on business edited

Strategic Journal of Business and Social Science (SJBSS) Volume 1, Dec 2018
Website: www.sj-bss.com Email: editor@sj-bss.com
Obinna Tony- Okeke: Differentiation Strategy and Business Impact, 2018
pg. 1
Strategic Journal of Business and Social Science (SJBSS) www.sj-bss.com
DIFFERENTIATION STRATEGY AND IMPACT ON BUSINESS
1 Obinna Tony- Okeke and 2Ugwuegbu Charles Onyemachi
1, 2, discipline: Business Management Imo State University Nigeria
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’ regarding 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.
Keywords: Differentiation Strategy, Business Impact
1. Introduction
The victory of APC as a 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 the
USA, Bill Clinton used a simple strategy expressed in four words ‘It is the economy,
stupid’ in defeating George Bush.

pg. 2
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 regarding
processes, quality and packaging, advertising, and distribution channels with that of
its competitors. For instance, “Manager’ table water is among the bestselling table
water in Owerri, Imo State. This is because the company was able to differentiate its
product with beautiful design. Again, Tummy-Tummy Noodles was able to gain a
substantial share in the food industry by adding a vegetable as an additional spice in
its noodle thereby differentiating itself from other brands of noodles in the market.
In achieving this differentiation, a good number of firms have resorted to ‘‘brand
awareness war through advertising’’ in order to create an image or identity in the
minds of their target market for their products, brands, and even their organizations.
A good example of differentiation strategy through advertising was the case of Coca-
Cola and their rival Pepsi. These two firms have long ago used different advertising
slogans in creating superiority in the soft drink industry. The following are some of
the advertising slogans used by Coca-Cola in telling their customers’ that its product
is more superior than Pepsi ( Coca-Cola satisfies, Delicious and Refreshing, Good
all the way down, Thirst quenching - delicious and refreshing, Cooling...
refreshing... delicious, Delicious, wholesome, refreshing, Delicious, wholesome,

pg. 3
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 the solution they found (Now It is
Pepsi for Those Who Think Young, Come Alive! You are 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.
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 fundamental assumption behind a differentiation strategy is that
customers are willing to pay a higher price for a product that is distinct (or at least
perceived as such) in some critical way. Superior value is created because the
product is of higher quality, is technically superior in some way, comes with superior
service, or has a special appeal in some perceived way. In effect, differentiation
builds competitive advantage by making customers more loyal-and less price-
sensitive-to a given firm’s product. Additionally, consumers are less likely to search
for other alternative products once they are satisfied (Jeff, 2009).
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 a theoretical and empirical
review. Next is the conceptual framework that will guide further studies and
conclusion.

pg. 4
2. Review of Related Literature
2.1 The Concept of Differentiation Strategies
Differentiation strategy is among the generic strategic approaches in building
competitive advantage. 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 fundamental assumption behind a differentiation
strategy is that customers are willing to pay a higher price for a product that is
distinct (or at least perceived as such) in some critical way. Superior value is created
because the product is of higher quality, is technically superior in some way, comes
with superior service, or has a unique appeal in some perceived way. In effect,
differentiation builds competitive advantage by making customers more loyal and
less price-sensitive-to a given firm’s product. Additionally, consumers are less likely
to search for other alternative products once they are satisfied (Jeff, 2009).
Aaker (1984) cited in Tom (2008) defines a differentiation strategy as one in which
a product is different from that of one or more competitors in a way that is valued
by the customers or in some way affects customer’s choice. A successful
differentiation strategy allows the firm to earn above the average returns. Aaker
(1984) cited in Tom (2008) further argues that a differentiation strategy is often but
not always associated with a higher price because it usually makes priceless critical.
It provides the organization with an insulator to competitors because of the brand
loyalty and the need to overcome the uniqueness. Differentiation strategy has
successfully been used to build customer loyalty and compete effectively in the
market.

pg. 5
Through differentiation, a customer is given reason to choose the brand and not any
other service or product. Although all products or services can be differentiated not
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. Product
differeciation 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

pg. 6
sophisticated or knowledgeable consumer interested in a unique or quality product
and willing to pay a higher price.
When using differentiation, firms must be prepared to add a premium to the cost
(Hyatt, 2001), because 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 critical 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 robust local need
(Darrow et al., 2001).

pg. 7
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.
2.1.2 Building a differentiation-Based Advantage
According to (Jeff, 2009) firms practicing differentiation seek to design and produce
a highly distinctive or unique product or service attributes that create high value for
their customers. Within the firm, according to him, differentiation-based sources of
competitive advantage in value-adding activities can be built through some methods.
Important strategic consideration managers must recognize is that differentiation
does not mean the firm can neglect its cost structure. While low unit cost is less
critical than distinctive product features to firms practicing differentiation, the firm’s
total cost structure is still relevant. Jeff (2009) further argued that the costs of
pursuing differentiation could not be so high that they erode entirely the price
premium the firm can charge. Firms pursuing differentiation must still control
expenses to balance somewhat higher costs with a distinctive edge in important
activities. The cost structure of a firm or business pursuing a differentiation strategy
still needs to be carefully managed, although attaining low-unit costs is not the
overriding priority. A firm selecting differentiation must, therefore, aim at achieving
cost parity or, at the very least, cost proximity relative to competitors by keeping
costs low in areas not related to differentiation and by not spending too much to
achieve differentiation. Thus, the cost structure of a firm practicing differentiation
cannot be that far above the industry average (Jeff, 2009). Differentiation should not
be an end to itself; organizations’ practicing it must endeavor in searching for new

pg. 8
ways to improve the distinctiveness or uniqueness of their products/services they
offer to their customers’.
In almost all differentiation strategies according to Jeff (2009), attention to product
quality and service represent the dominant routes for firms to build competitive
advantage. For example, firms may improve a product’s quality or performance
characteristics to make it more distinctive in the customer’s eyes, as Lexus does with
its sleek line of automobiles or Tiffany & Company does with its broad line of
jewelry and gift items. The product or service can also embody a distinctive design
or offering that is hard to delicately, thus conveying an image of unique quality; as
with (Jeff, 2009).
After-sales service, convenience, and quality are essential means to achieve
differentiation for numerous firms, such as for IBM in computer and electronic
commerce technology or Hewlett-Packard in desktop printers and digital imaging
technologies (Jeff, 2009).
Organizations can still purse differentiation through technologically advanced
products like adding new features that convey a sense of quality that enables firms
to distinguish themselves from competitors, as Sony has done with great success in
its Walkmans, Discmans, Trinitron television sets, and now PlayStation 1 and two
video game systems (Jeff, 2009). Technological innovation will enable firms to stay
ahead of the competition, improve new product development and remain in touch
with market trends and consumers’ needs. It is not unusual for firms practicing
differentiation to invest in production processes that use specially designed
equipment that makes it hard for rivals to imitate the product’s quality (Jeff, 2009).
Olympus Optical fine camera lenses are one example says, Jeff. Olympus’s skills in

pg. 9
fine optics and lens grinding make it difficult for other competitors to rapidly imitate
its fine quality of cameras, microscopes, and other laboratory instruments that
command premium prices through the world (Jeff, 2009). Any potential source of
increased buyer value represents an opportunity to pursue a differentiation strategy.
According to 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. By 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 that competitive strategies based on high product quality 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 Noodles industry has experienced several

pg. 10
series of liquidation (Dangote noodles and Mimee Noodles) based on differentiation
on quality. Dangote and Mimee noodles liquidated because they are unable to
compete based on quality.
On the side of the disadvantage of differentiation, a firm is faced with a great
challenge of being “out differentiated” by firms that already have distinctive
products by providing a similar or better product. Irrespective how effective a firms’
differentiation is regarding generating customer loyalty, and higher price might be,
it cannot seal the presence of new entrants in the market completely especially where
the new entrant has the needed capabilities and resources to compete favorably with
established firms’.
Excessive product proliferation according to Jeff (2009) can even hurt a firm’s
attempt to de-differentiate, since customers may become confused with the wide
variety of offerings. For example, H.J. Heinz’s recent moves to offer ketchup with
different coolers may have backfired, as some buyers are turned off by the prospect
of putting purple or green ketchup on their French fries (Jeff 2009). The move to
out-differentiate another rivals can be seen among Radio Stations in Imo State. Hot
Fm differentiated itself from Heartland and Orient Fm by incorporate programmes
like ‘Birth Day Shows, New Paper Review and ‘People’s Assembly.’ The Peoples’
assembly allows people to call in and participate in national issues as reviewed in
the national newspapers and is being done in the English Language. Today, the
emergence Darling Fm has rebranded the people’s assembly as initiated by Hot Fm
making it more interesting as the programme is now being done in Igbo Language
allowing people to listen and participate to national issues in their dialects. Also,
Gold Fm has improved on the Birthday Show as introduced by Hot Fm by allowing

pg. 11
callers who want to celebrate their loves once to choose any music of their choice
they want them to play for their loves once.
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 from 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 massive loss of sales and
market share for Coca-Cola. In responding to the above threat, Coca-Cola launched
35cl at N100 to compete with Pepsi’s 50cl being sold at N100. Still, at that, the
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. Alternatively, 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 overtax 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

pg. 12
steering wheels for its line of cars and a broad line of the engine, all of which
eventually confused customers and made manufacturing costly. Nissan recently
announced a sharp reduction in the 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 a source of Competitive Advantage
In order to understand the concept differentiation strategy as a source of competitive
advantage, the Resource-Base View (RBV) Theory and the Capability Theory was
reviewed.
The resource-based view theory has defined substantial 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 and
not entirely/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 entirely mobile, the heterogeneity among organizations is
bound to exist for a long time. If an organization with scarce resources can create

pg. 13
value and its resources either cannot be imitated by its competitors, or easily replaced
by other resources, then such an organization has a monopoly position and thus
condition necessary for achieving sustainable competitive advantage and the excess
profits (Joy, Oluwole, and Ibidunni, 2013).
The Resource-Based-View (RBV) helps to explain why some resources are more
advantage-generating than others and also why resource asymmetries and following
competitive advantages persist even in conditions of open competition.
Organizations with similar resources often have a difference in the efficiency of
resources usage brought about by the differences in capability, which is the reason
for the deep-seated competitive advantage (Liu and Huang 2009). Prahalad and
Hamel (1990) cited in Joy, Oluwole, and Ibidunni (2013) defined core capability as
the accumulated knowledge of the organization, especially about how to coordinate
the different skills of production and the organic integration of a variety of technical
flow of knowledge. Core competitiveness is a mixture of many factors; it is the
combination of technology, governance mechanisms, and collective learning. Core
competitiveness is the collection of a set of skills and technology, not a single
technology or skill. It is a source of competitive advantage.
There are three main features of core capability as cited by Joy, Oluwole, and
Ibidunni (2013):
1. The core capability has the full user value, able to create value and reduce costs.
2. The core capability is unique; it is difficult to imitate by competitors.
3. The core capability must have the ability to provide support for the organization
to access some markets.

pg. 14
Barney (1991) cited in Joy, Oluwole, and Ibidunni (2013) conclude that resources
and capabilities of firms are keys to creating sustained competitive advantage and
achieving superior performance.
2.3 Impact of Differentiation Strategy on Business
In order to investigate the impact of differentiation strategy on business
performance, the following empirical reviews were carried out:
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 were 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 relationship 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 a product differentiation strategy, but the
relationship between product differentiation strategy and dividend payout with the
performance was negative.

pg. 15
Similarly, Enida, Vasilika, & Amali (2015) investigated the impact of generic
competitive strategies on organizational performance. The data was collected using
questionnaires and analyzed using the ANOVA statistical model. The study found
significant positive effects of cost leadership, differentiation and focus strategies on
performance.
The study findings of Acquaah and Yasai-Ardekani (2008) show the viability and
profitability of implementing cost leadership, differentiation, and the combination
of the unique strategies. Nevertheless, the incremental performance benefits to
firms implementing a combination strategy do not significantly differ from the
performance of firms implementing only the differentiation strategy. Also, firms
that implement a coherent competitive strategy (combination, cost-leadership, or
differentiation) tend to gain considerable incremental performance benefits.
Also, the study findings of Amoako-Gyampah and Acquaah (2008) who examined
the relationship between manufacturing strategy and competitive strategy and their
influence on firm performance indicate that there is a positive relationship between
competitive strategy and the manufacturing strategies of cost, delivery, flexibility,
and quality. Also, the result shows that quality is the only manufacturing strategy
component that influences performance indirectly.
Prajogo and Sohal’s (2006) results also indicate that Total Quality Management
(TQM) is positively and significantly related to differentiation strategy, and it only
partially mediates the relationship between differentiation strategy and three
performance measures. Allen and Helms (2002) were of the opinion that different
types of reward practices more closely complement different generic strategies and
are significantly related to organizational performance. Mosakowski (1993) cited in

pg. 16
Joy, Oluwole, and Ibidunni (2013) study’s results generally supported the
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 is 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
Figure 1. Conceptual framework
Product Innovation
Higher Product Quality
Lower Cost
Differentiation
Market Share
Customer Loyalty
Differentiation
Strategies
Organizational
Performance

pg. 17
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 are of quality, the design is enticing, and finally,
innovation should be on a continual basis to enable the organization to stay ahead of
the 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’ regarding 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.
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pg. 18
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