Classic Innovation Strategy (Part 2 of 3)
Classic innovation strategy focuses on the markets, technologies, and product categories. In general, a strategy is designed to express the objectives and purpose of a business. It is often expressed through the mission statement of the firm.
Over the years, a variety of experts have offered their opinions and categorized strategic approaches for businesses in a number of ways. The classical approach to strategy is base don’t eh work of Michael Porter. For more information, please see Chapter 1 of NPDP Certification Exam Prep: A 24-Hour Study Guide.
Classical Strategy Framework
The classical strategy framework focuses on elements of market scope and competencies of the business. Many businesses have matured with unique capabilities in effectively managing costs and supply chain, for example. In other instances, firms are well-known for their sleek product design or efficient customer service. Still other firms strategically focus on a narrow market in order to reach profitability goals.
As discussed in Part 1 of this series, a cost leadership strategy is one that serves a broad market but has established cost effective manufacturing and distribution processes. This week, we’ll discuss the advantages and cautions of differentiation strategy and we’ll wrap up the series on classical innovation strategy next week with a description of the focus or segmentation strategy.
As indicated, a differentiation strategy serves a broad market. While it is likely to have a lower market share than a firm following a cost leadership strategy, profits are high due to the perceived product and service differences among customers. Product quality, features, and/or services are viewed by customers and end-users as being significantly different than the competition. These customers are attracted to the brand and are normally loyal, repeat purchasers.
A differentiation strategy in retail can be supported by many examples. Using the example of Wal-Mart as a cost leader, we can use the example of Macy’s as a firm following a differentiation strategy. Both companies address a broad market, yet Macy’s distances itself from other competitors by offering an image that customers perceive as higher class, trendier, and providing unique service.
For instance, Macy’s differentiates itself from value retailers by staffing its perfume and make-up counters with specially trained experts. Branding is extended from the product to the service clerks, and professional attire sends a distinctive message to consumers. “We know what we’re doing!” White lab coats add to the perception that a customer is buying make-up from a highly skilled professional who will transform her and keep her safe.
Other elements in the retail experience add to the differentiation strategy. Lighting, store organization, and accessibility of customer service staff all differentiate Macy’s from a low cost competitor. Differentiation offers many benefits to the firm as well.
Advantage of a Differentiation Strategy
Because customers perceive the unique customer service or product features as special, a company following a differentiation strategy is typically less sensitive to price fluctuations than the general market. Not having to compete with commodity products on price leads to higher profit margins. Often the cost of production and distribution is only marginally higher than in a cost leadership strategy; however, perceived quality differences allows the selling price to be set at significantly higher points.
Another advantage of the differentiation strategy is a reduced threat of substitution. Because switching costs are low for customers purchasing commodity-like products, brand loyalty is mostly non-existent. On the other hand, when a customer needs to learn a new service protocol, s/he is less likely to switch providers. Supermarkets, for example, could take advantage of this characteristic of the differentiation strategy by offering a large, organic produce section while maintaining minimal selection of paper goods (paper towels, tissues, and toilet paper). Customer perceive the difference in produce and face a high switching cost to do their weekly shopping at another supermarket.
Disadvantages of Differentiation Strategy
By definition, the differentiation strategy is focused on a higher margin, smaller market share. Losing the perceived customer quality differentiation is devastating to this strategy. A firm must have strong marketing capabilities and effective quality assurance.
Additionally, a differentiation strategy relies on effective and productive human resources. Training programs must be comprehensive to support the customer service differentiation but can be expensive. Continued innovation and quality improvement are also fundamentally important to successful execution of a differentiation strategy. Time-to-market of new products is, therefore, critical in order for a firm to maintain competitive advantage over competitors.
Attacking a Differentiation Strategy
Competitors can gain an advantage over a firm with a differentiation strategy by cutting into their market share. For example, offering a standardized product with high quality will disrupt the advantage of differentiation. Another way to attack the differentiation strategy is to couple a service package with product sales.
Finally, as discussed in the product life cycle, offering a full product line with both down-market and up-market products will interfere with the unique competency of a differentiated competitor. A “one-stop shop” can reduce the decision costs of consumers. Coupled with a variety of profitable service contracts, a company can eliminate many perceived benefits of a differentiation strategy.
The Differentiation Strategy
Focusing on a unique customer value while serving a broad market is the cornerstone philosophy of the differentiation strategy in the classical innovation framework. This strategic approach yields high margins but is hindered by a low market share. Threats to success are introduced by disruptive competitors yet the differentiation strategy is successful when a firm concentrates on quality product and service offerings.
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