Differentiation: the Key to Leadership
If you manage to lead the way, you win the game. In the ever-changing context of the business world, firms need to struggle hard to win the games going on in the market and one of the ways in which a firm can not only lead the way but also win the game is through differentiation to earn market leadership (Neray). This essay gives an account of how a firm can build up its leadership in the marketplace using the ever-reliable strategy of differentiation.
Every firm which operates in competitive markets needs to fish for its market shares form its competitors; the competitors, in turn, also have their rods in the same pool.
Thus in order to be impressive and catchy, a firm needs to become unique in one way or the other. The answer to this query comes form the strategy of differentiation as it provides a firm with the uniqueness that is valuable to buyers beyond simply offering a low price. Though differentiation has its own costs, it supplies the firm an edge over its competitors. In other words the firm is able to build up a strong competitive advantage over the rivals. Consequently, the customers are willing to pay a price premium which not only covers the costs but also earns a firm profit (Grant, 271).
Besides attracting customers, differentiation also fosters a leading image of the firm among customers in the market as well (Daye). The most powerful legacy of differentiation is leadership (Daye). Thus Neray writes, “Differentiation-based leadership places the onus of grasping, defining and communicating that differentiation on the shoulders of the leader, and extends the concept to encompass every area of business — including the leader him or herself”. Thus, “leadership comes in many flavors, any of which can be an effective way to differentiate yourself” (Daye).
We, hence, come to the conclusion that differentiation strategies are not meant only to pursue uniqueness for the sake of being different but for leading the way (Grant, 272). How, then, does differentiation work? As a matter of fact, the characteristics of the product allow a firm a range of differentiation opportunities. To be successful, however, firms need to consider both the capabilities of the firm to create differentiation (the supply side) and its customers (the demand side).
The differentiation through the supply side as well the demand side leads not only to the creation of a cost-effective value for the customers but, resultantly, differentiation advantage and market leadership too for the firm (271). Moreover, the consideration of the demand side and the supply side helps an organization in understanding its customers in relation to its product’s potentials and capabilities. However, establishing and maintaining differentiation advantage requires creativity (272).
The most important rule of differentiation is the understanding of the product in terms of the complexity of satisfying physical or tangible needs of customers (273). More complex products offer better opportunities for differentiation. Nonetheless, product satisfaction is primarily only a mental perception and is limited only by the boundaries of the human imagination. Thus differentiation relates to every aspect of customer’s life as well as is related to all activities within the organization, its identity and culture.
Differentiation, nevertheless, results in both tangible as well intangible impacts on customers as well as firms. Resultantly, when a customer values a product, she in fact values the firm. Thus differentiation is such an equilibrium which equates firm’s potential and reputation- supply- to customer’s complex choices- demand (274). The Demand Side of Differentiation Leadership encompasses value propositions, brand promises, strategic competitive advantages and all other diverse marketing terms, which the customer values, grounded in the same fundamental principal of differentiation (Neray).
Therefore, understanding customer demand enables us to determine which product characteristics create value for customers (Grant, 276). Virtually all products and services serve multiple customer needs and thus have multiple attributes (277). For that reason, customer’s demand may be viewed as the demand for the underlying attributes that a product provides. The selection of optimal attribute, in turn, is what makes it possible to earn a price premium for each attribute (279). In addition to his, the optimal provision of attributes to the customers creates the advantage and the leadership prospects among other rivals in the market (280).
Customers have varied motivational factor guiding them in valuing certain attributes of a product or service. Besides looking for merely the survival aspects of satisfaction to be driven from the purchase, customers are also looking for establishing their own identity with in their communities, and making sense of what is happening around them. Therefore, the implications of differentiation are far reaching and require the understanding of different aspects of customer’s demand; for example, the lifestyles, aspirations, sex, age, income and other demographic, socioeconomic, psychographic characteristics.
The understanding by firm of all these variables and the resulting response to them form the basis for driving customer’s behavior (280) and building up of a leadership position among all the stakeholders including customers, employees, strategic partners, investors and especially the competitors (Neray). Though, the choice of market scope has vital implications; in a broad-based market differentiation, understanding common needs o f the customers ascertains a firm’s rule over the market if the supply conditions are capable of capitalizing over such understanding (Grant, 282). The Supply Side of Differentiation
They say that the most often-used strategy by leaders is proclaiming how well they sell (Daye). Creating market leadership through differentiation rests on a firm’s ability to offer differentiation or to supply the differentiation. In this regard, the activities a firm performs and the resources it has access to are of extreme importance. As mentioned earlier, differentiation is concerned with the creation of uniqueness, a firm’s ability to create uniqueness that its customers would value lies in everything that it does including product features, product performance, complementary services (e.g. , credit, delivery, repair) , intensity of marketing activities, technology embodied in design and manufacture and the quality of purchased inputs (Grant, 283).
A firm’s activities can distinguish it from its rivals, let it achieve the highest level of productivity and efficiency and create the value what sets it apart (Neray). Thus, instead of looking for core strengths and passions, firms need to apply such a leadership scenario where companies have products that are big performers and, in turn, are able to separate them from other lesser-performing competitors (Daye).
Thus, the establishment of a coherent and effective differentiation position in the marketplace requires that the firm assemble a complementary package of differentiation activities (Grant, 285) which are capable of maintaining organizational integrity and are ultimately responsible for crafting the values and the images with which its products as well as its reputation is associated (286). One of the most important capabilities, in this regard, is the technological breakthroughs that can help firms to form of leadership as a differentiator (Daye).
Once the differentiation has been created, the development of leadership then rests on how effective it is communicated to customers (Grant, 287; Neray). Brand names created through differentiation and the advertising that supports it act as important signals of quality and consistency which are valuable assets (Grant, 288). Thus, being articulate in the marketplace itself is a character forming uniqueness laying the foundation of the leadership style. Moreover, discovering, acknowledging and valuing what sets a firm apart from it rivals lie at the heart of differentiation-based leadership (Neray).
The Molding of the Value Chain Once the leadership through differentiation is built up, judicious leaders will solidify their positions throughout their value chain (Daye). The value chain of market leaders is woven within the match of the firm’s capacity for creating differentiation to the attributes that customers value most. The use of the value chain to identify opportunities for differentiation-based leadership involves some principal stages. At first, it is useful to consider a firm further downstream in the value chain and not only the immediate customer.
Sometimes, however, it is better to create separate value chains for distinguished customers. Secondly, identification of the drivers of uniqueness in each activity a firm performs contributes to differentiation and the uniqueness can be effectively achieved. Thirdly, selection of the most important and promising activities and variables form the basis for the firm’s differentiation strategy. Finally the firm’s ability to locate the linkages between the firm’s capabilities and the customers needs results in the completion of forming the value chain conducive to developing the differentiation-based leadership (Grant, 290).
These four stages together form the process of self-discovery and identity that firms harness as the center of their authenticity and become powerful leaders (Neray). Differentiation is a trusted strategy businesses pursue to develop sustainable competitive advantage over their rivals. If followed trough strengthened coordination of organizational capabilities throughout the value chain and the value perception of the customers in ways better than all other rivals, the strategy of differentiation strategy may result in a form of such an elite differentiation advantage we can call differentiated-based leadership.