Product or Service Differentiation - Coursework Example

Introduction Firms strive to gain competitive advantage in the market so as to have customer loyalty and increased revenue by position their products or being cost leaders (Porter, 1980). According to Porter, cost leadership and product differentiation should be applied in isolation to avoid firms being stuck in the middle. However, some critics argue that applying cost leadership and product differentiation strategies work best when applied simultaneously to achieve sustainable competitive advantage. On the other hand, costing strategies are easy to duplicate by competitors hence only offer a temporary competitive advantage and attract unnecessary competition. It is in this regard therefore that kotler and Keller (2009) advocate for product differentiation as the key to competitive advantage. Product differentiation entails production of a unique product from the competitors as perceived by customers. The difference is based on product features, service attributes, price, relationship of firm and customers, linkages within or between firms, distribution channels, product mix, service and support among others (Piana, 2003). According to Hooley, Saunders & Piercy (2004), successful product differentiation can be attained through rigorous advertising, public relations, and research and development. Availability of resources is also essential as it gives a firm the capability to continue improving the product through research and maintaining competitive advantage. Piana (2003) observes that differentiation can be vertical or horizontal where vertical differentiation focuses on order of goods according to quality; low quality, medium or high quality and that high quality goods are higher priced as opposed to low quality products which are of low cost. The difference may not exist but customers may perceive high priced good as of good quality. Horizontal differentiation on the other hand, is based on tastes, styles, and color among other features. Product differentiation is carried where a target segment exists based on unique needs of customers. Bases of Product Differentiation Product differentiation is based on several factors such as; product or service features, relationship of firm and customers, linkages within or between firms, product mix, product customization, distribution channels, advertising, and reputation among others. The differentiation is meant to achieve customer satisfaction, gain market share and increase sales and profit as well as protect the firm from any barriers that hinder competitive advantage (Kotler & Keller, 2009). New entrants into the market find it difficult to penetrate a product differentiated market as costs incurred in achieving same status are high. It also reduces rivalry among firms through establishment of market segments. Customers become loyal to the firm’s brand hence are price insensitive thus enabling the firm to pass on supplier price increases to them. The power of buyers is also reduced as firms with successful product differentiation act as monopolies and buyers have no alternatives unless close substitutes exist. This is why firms carry out continuous scanning of the environment to improve products and eliminate any possibility of close substitutes cropping up which hinder competitive advantage (Afuah, 2008). The bases of product differentiation should be in such a way that it is difficult to duplicate so as to have sustainable competitive advantage. Duplication of products prevents a firm from enjoying competitive advantage as new entrants to the market emerge. A firm should also develop good relationship with stakeholders so as to enjoy the benefits of this relationship such as a good reputation and brand loyalty. Good management and organization structure as well as proper compensation policies enhances product differentiation (Raturi, & James, 2005). Managers should have a good relationship with employees and encourage creativity, innovation and team work among them hence successful product differentiation. Rewards should be given to innovators and failure in experimentation should not be punished but treated as an opportunity for growth. Differentiation is only successful if it results in adding value to the firm in terms of extra price paid by customers for unique products offered. This enables firms to increase revenue and profits. The base hence should be valuable, rare, inimitable and non-substitutable. Product Features A firm can gain competitive advantage by developing unique features of its products. According to Anderson, Palma & Thisse (1992), characteristics of a product include; patents, trade-marks, trade names, packaging, quality, design, performance, reliability, color and style. It also entails external environment conditions such as timing and location. First the firm establishes a target market where to sell products due to diversity of needs by consumers which cannot be satisfied by mass market hence appropriate application of market mix is needed (Kotler & Armstrong, 1999). A firm is thus able to understand the customers and be able to design products suitable for them. A segment is identified based on geographic properties, demographic factors, company type and location, behavioural characteristics and psychographic factors. Once a segment is established, a niche is created and firm protects it against intruders. If a firm has unique resources to design a product and capability to satisfy the needs in a way difficult for others to copy, it can acquire patent for the product hence make it difficult for competitors to design similar product as ownership is guaranteed (Porter, 1980). The trade-marks and trade names are a way of differentiating a firm’s products. Customers become acquainted with the products and develop loyalty for the brands. This enables the firm to gain competitive advantage over the others. Brand marketing and management is essential as it makes customers to perceive the product as better than that of competitor despite the similarity of the products (Kotler & Armstrong, 1999). This is especially so for fashion brands where customers prefer certain brands of clothes even if they are not superior to those of competitors. Once customers develop brand loyalty, it is difficult to convince them otherwise. The way goods are packaged influences customer buying behaviour. It may be appealing to customers than the competitors’ hence competitive advantage. On the other hand, competitors can observe how the firm packages goods and imitate hence more competition. This differentiation is therefore temporary and can’t sustain competitive advantage. An example of packaging is use of cans as opposed to paper labels. A firm can also use unique packaging for its products so that they appear unique to customers and attract them (Leonard, 1996). Products can be differentiated on the bases of quality. Most customers seek high quality goods and services and hence firms aim at improving the quality of their goods to outdo those of competitors. This can be achieved through innovative manufacturing processes, trained experienced and dedicated staff, technical capability and good decentralized management (Barney, 1991). This makes is difficult for competitors to duplicate the goods. Vertical differentiation is carried out in establishing quality. Low quality products are low priced but are easy to use while high quality products are highly priced and complex in usage hence difficult to imitate, for example iPhone and iPod offered by Apple. Some customers also judge the quality of product based on price regardless of whether it is actually of high quality hence advantageous to producers (Beath & Katsoulacos, 1991). However, some competitors can imitate quality as it is observable leading to loss in market share for the firm but as Porter (1990) observes, taking advantage of opportunities and entering the market earlier creates a sustainable competitive advantage by building brand recognition, loyalty as well as strong relationships with suppliers and distribution channels. Such an advantage is enjoyed by companies like Gillette razors. Styles and tastes are also important features of products that can be differentiated. A firm can develop similar products with different styles and tastes for uniqueness especially food products such as chocolates which have different tastes. A unique price is attached to the products hence customers have a variety to choose from. The fashion industry also operates depending on style and occasions. Different styles are offered in different occasions and different timings such as during festivities, holidays or during cold or hot seasons. The timing of the firm is hence essential in product differentiation as it’s a one time event (Porter, 1980).Same style of garments can also be offered in different colours depending on taste and preference of customers. Timing is difficult to imitate hence sustainable competitive advantage. Reputation Product differentiation can be based on reputation. A firm develops strategies that enable their products to become popular and acceptable to many customers through product features, advertising, good relationship with suppliers, distribution channels, and service delivery. Handling customers well makes them to spread word of mouth to others and hence make the firm popular and also its products. Convincing customers that products are unique also helps to gain reputation and brand loyalty which acts as entry barrier to new firms (Hooley et al. 2004). This makes customers to purchase from the firm even if competitors exist with similar products such as the case for Nike athletic shoes and Rolex watches. These two products are very popular and are perceived to be unique hence sustainable competitive advantage for firms that produce them. Reputation cannot be imitated hence advantageous to the organization. Relationship of Firms and Customers This is achieved through product customization and consumer marketing which targets customers’. Anderson et al (1992) emphasizes the need for an entrepreneur to maintain good links between him/her and employees as a basis for customer satisfaction. A good relationship with employees and involving them in decision making and offering compensation services makes them to have job satisfaction and enhanced creativity hence product improvement and innovation. They also treat customers well making them to have repeat purchase and brand loyalty. They also produce quality products which are superior to those of competitors which is an advantage for example Rolex watches. They are also able to understand customers and design products suitable for their needs as standardized products do not create product differentiation which is essential in achieving sustainable competitive advantage (Afuah, 2009). Product Customization Different customers order different goods with specific features based on their taste. The manufacturers thus produce goods based on order specifications given by customer using different manufacturing processes. For product differentiation the manufacturer aims at reducing delivery time, quick response to inquiries, reduced usage of resources and reduce errors in specification. The manufacturer also optimizes the products to satisfy customer needs by use of specialized machines or configurations that help to make production easier. The company thus gains competitive advantage over competitors due to increased efficiency. For example sandviken a Swedish company that manufactures steel holders introduced a configuration system to work out product and manufacturing specifications for customized steel holders hence reducing time used in production of such specifications (Hvan et al, 2008: 2). Product Mix Product mix entails all products offered for sale as product lines or individual products. A company can differentiate its products based on the product mix by offering a wide range of products not offered by competitors or introduce new products to attract customers. A firm can decide to offer salon services in a shop or fast foods. Product mix may be costly to imitate hence the firm enjoys competitive advantage (Hooley et al. 2004). Location The location of an establishment determines whether the firm will enjoy competitive advantage. If a firm is situated in an area where there is high competition, it can relocate to another area with no competition but first carry out environmental scanning to establish whether a target market exists or customer needs (Kazmi, 2008). If there is enough market, then he/she can locate the business close to consumers. This enables the firm to gain competitive advantage as no other firm in the area is selling the product but as long as no new entrants emerge. The surrounding consumers will buy from the firm and by the time other firms emerge, the firm will have establish a strong customer base and brand loyalty essential to maintain competitive advantage. Strategic location ensures that this goal is accomplished. Distribution Channels A firm can differentiate products by use of unique distribution channels such as the use of coke and Pepsi vending machines (Hooley et al. 2004). Effective and timely distribution of products making them available to consumers on demand is essential in positioning a product in the market. Many financial institutions are engaged in rigorous development of distribution channels to attract customers through use of credit cards, on-line banking, ATMS, mobile banking among others. If a bank introduces unique channel, then it would gain advantage over others. Remote areas access can also be an effective distribution channel to rural areas provided it is cost effective or premium is paid for closer product and service delivery. Advertising Advertising creates awareness to consumers that such a product exists. It is used to convince the buyer that the product is more superior to the competitors even if the products are similar. Tremblay & Polasky (2002) argue that advertising creates horizontal and vertical product differentiation and distance between products hence increasing market power of firms. Various strategies are used in advertising such as posters, after-sale services, packaging, and oral or talking directly to customers and collecting their views for product improvement. Peer influence also plays part in advertising and buying decisions. The power of seller to convince buyers that their products are superior determines their buying behaviour and repeat purchases as well as building brand loyalty making the customers’ price insensitive. Linkages Within or Between Firms According to Hooley et al (2004), competencies of different functions within or across organizations should be combined in order to produce tangible differences. Each section in the firm is essential in ensuring a quality product different from competitors is produced. The finance function ensures cost minimization; marketing function ensures availability of a niche segment and availability of distribution channels and promotion activities. The human resource department is also essential in staff development for quality and productivity. All these functions combine ensure a unique product or service is produced. For example, the linkage between functions of auto manufacturing and finance of Ford motor organization. Conclusion Product differentiation is the key to achieving sustainable competitive advantage. The differences are based on products and services as well as other factors such as distribution channels, product customization, product mix, location, reputation, service and support, timing, relationship between the firm and customers among others. For a firm to be able to carry out product differentiation, it should establish a target market where to offer the product based on unique and diverse needs of customers. The base for differentiation should also be difficult or costly to imitate so that the firm can maintain competitive advantage. Successful product differentiation allows the firm to fight against threats such as rivalry, new entrants, substitutes, suppliers’ and buyers’ power. Product differentiation enables customers to develop preference for product or service, adds value to the firm and firm is able to increase sales and profit. References Afuah, A. 2009. Strategic Innovation: New Game Strategies for Competitive Advantage. New York: Routledge. Anderson, S., Palma, A., Thisse, J. 1992. Discrete Choice Theory of Product Differentiation. USA: Massachusetts Institute of Technology. Barney, J. 1991. “Firm Resources and Sustained Competitive Advantage”. Journal of Management 17: 99-120. Beath, J. & Katsoulacos, Y. 1991. The Economic Theory of Product Differentiation. New York: Cambridge University Press. Hooley, Saunders & Piercy. 2004. Marketing Strategy and Competitive positioning (3rd ed). New Jersey: Prentice Hall. Hvan, L., Mortensen, N., Riis, J. 2008. Product Customization. German: Springer. Kazmi, A. 2008. Strategic Management and Business Policy (3rd ed). New Delhi: McGraw-Hill. Kotler, P., Armstrong, G. 1999. Principles of Marketing. New Jersey: Prentice Hall. Kotler, P & Keller, K. 2009. Marketing Management (13 ed). New Jersey: Prentice Hall. Leonard, E. 1996. Packaging: Specification, Purchasing and Quality Control (4ed). 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