Stand Out from the Crowd | Examples of Differentiation
Differentiation is the principle of setting a company apart based on specific elements of the company. For the entrepreneur, understanding how to best differentiate a new company may be a source of frustration and confusion. Studying the strategies and methods of successful companies can help provide guidance for any company who wishes to take their business to the next level.
This article will provide 1) a general overview of differentiation strategies and then 2) study examples of differentiation strategies used by: a) Virgin Airlines, b) Etsy, c) Walmart, d) Apple, and e) Nike.
GENERAL OVERVIEW OF DIFFERENTIATION
Before examining the differentiation strategies of different companies, it is helpful to understand the concept of differentiation. When used as part of a larger competitive strategy, differentiation can be essential in propelling a company to the next level of growth.
There are several elements of differentiation: pricing, product and organization.
Pricing is the function of income and profit – the determining factor in the support of the organization. It can fluctuate based on supply and demand, and can be an indicator of the customer’s ideal value for the product. Companies that differentiate based on price can either determine to offer the lowest price, or can attempt to establish superiority through higher prices.
Another area of differentiation is through product offerings. Innovative products that meet customer needs can be an area where a company has an advantage over competitors. The pursuit of new product offerings can be costly – research and development, as well as production and marketing costs can all add expenses to a company before the product has even been offered to the customer, making this one of the riskier forms of differentiation. The payoff, however, can be great as customers flock to be among the first to have the new product.
Organizational differentiation is yet another form of advantage. Maximizing the power of a brand, or using the specific advantages that an organization possesses can be instrumental to a company’s success. Location advantages, name recognition and customer loyalty can all provide additional ways for a company differentiate itself from the competition.
EXAMPLES OF CORPORATE DIFFERENTIATION
Spearheaded by Richard Branson, Virgin Airlines is one of the multiple industries grouped under the “Virgin” label. Described by Branson as a company known for “innovation, quality and a sense of fun”, Virgin Airlines has taken to the skies in an effort to make air travel affordable and enjoyable. Virgin Atlantic, established in 1984, was born one night when Branson’s flight to the Virgin Islands was cancelled. Undaunted, he charted a plane and offered his fellow travelers a seat on the new plane for $29. His airline was born. Virgin America started in 2004, operating in the United States and other western countries. Virgin’s business model is offering inexpensive fares, full service flights and outstanding customer service.
Virgin’s differentiation strategy is two-fold: pricing and service. By reducing the costs associated with air travel, Virgin Airlines is able to remain competitive with the cost-cutting airline companies. Lower costs, however, don’t translate into fewer services – Virgin is a full service airline with on-plane WIFI, touchscreen seatback entertainment, and full service meals available with roomy cabins.
Through acquisitions and subsidiaries, Virgin is able to operate in different markets around the world, capitalizing on the Virgin name and promoting their services. Establishing a successful airline company brings new sets of regulations and procedures, depending on what country the airline is operating in. Virgin has remained consistent in maintaining their business model: competitive pricing, excellent customer service; however, the airline has had its ups and downs in the 30 years it has been airborne.
A clear strategy has enabled Virgin to maintain their presence in the global air travel market: remain true to the Virgin brand. Promoting the brand and capitalizing on the Virgin name has been essential to the success of the company. That helped to springboard the airline to popularity, but the well-positioned airline is relying on their sound business strategy to keep them at the top of the airline list.
Drivers of success/failure
Their two strategies: low costs and excellent service are both a part of their successes, and their failures. By offering customers low costs, they are in direct competition with other low-fare airline services and customers have multiple options. The extra amenities and customer service that is exemplary are often the deciding factor in a customer’s choice to select Virgin over another airline. (A stunning affirmation that Branson’s plan works.)
However, in the United States where regulations are strict and competition is fierce, the market is not as easy to conquer. Because of the high number of amenities the airline offers, the costs associated with the airline are high and offer lower profit margins. The power of the Virgin brand is compelling, however, and the Virgin vision is for a long-term drive to success. In the eyes of the corporation, the slow and steady race to profitability is preferable over the short (and short-lived) success.
Online artisan store and shopping gallery, Etsy offers its users the chance to showcase their handmade wares and sell them to customers around the world. From their beginnings as a crafter’s paradise, Etsy has carved out a niche company through sales of craft supplies as well as homemade items. Through Etsy, a community of crafters has found a home on the internet and the world has been opened to the amateur crafter who wishes to sell their products. The Etsy business model brings together the craftiness of individuals and the business savvy of investors who are confident the Do It Yourself crowd will also be members of the Let Someone Else Do It crowd.
Etsy is relying on the diversity of the products they offer to differentiate themselves from the hundreds of available craft sites online. By limiting their product offerings to craft items, they are targeting a specific portion of the market, giving them the edge they need to stand out from the crowd.
Drivers of success/failure
Etsy has several distinct features working in its favor. Price point is a key factor in the success of the online store: a majority of Etsy’s customers spend between $15.00 and $20.00. They charge a relatively low fee to vendors for handling the payment transaction, and a small fee is charged per item listed in the crafter’s ‘store’. With low fees, the company is able to remain competitive with other online shopping services such as eBay and Amazon. A wide variety of products is available, leaving customers a well-designed website to browse through and highlight on social media.
While the company has enjoyed success since the company began in 2005, there are a few elements of their strategy that have the potential of becoming a failure. In addition, their success has created problems for the artisans who are unable to keep up with the higher number of demands. A majority of the artisans on Etsy are simply hobbyists who craft in their spare time. The growing sales figures are causing the crafters to work longer hours and are maximizing the number of items that they can personally produce. The company recently made changes to their user agreement; allowing products to be sold that were designed by an Etsy member, but may have been produced by someone else. The ‘mass production’ of craft items is a slippery slope – at what point is an item considered handmade?
Etsy is at a crossroads and must decide to remain true to their original intent: providing a ‘virtual craft fair’ for artists or seek higher fortunes through expanded offerings and growth.
The vision of Sam Walton was to build a company that offered convenience and low prices. His original intent has driven the company to huge financial gains, and the company has not changed their business model. Through the last twenty years, the company has built massive super stores, offering everything from automotive supplies to groceries and clothing. Recently, the company has expanded its one-stop shopping center empire to include small, neighborhood market stores.
Walmart has a clear differentiation strategy: pricing. Everything that Walmart does is specifically selected to keep prices low. Their famous “roll-back” pricing strategy is designed to constantly monitor competitor pricing and offer a lower price. Through purchasing, shipping, warehousing and retail marketing, Walmart is standing out by consistently giving customers exactly what they want or need at a lower cost.
Drivers of success/failure
The market for low-cost retail stores is always in constant upheaval. There are several competitors in the market, although few can come close to the scope of Walmart’s organization. The distribution channels that Walmart has put into place are one of the key factors in their success. With a network of warehouses, shipping services and innovative stocking methods, Walmart remains a market giant for convenience and price. Developing their own integrated systems for ordering, shipping and delivering, Walmart is able to maintain their low prices.
While their market saturation can be seen in the number of Walmart locations, their continued expansion can also be an indicator of its failure. Walmart is often not received well in smaller communities, where residents are concerned about local businesses being affected, environmental impact and traffic concerns in the areas that Walmart is built.
In addition, because Walmart bases their differentiation on pricing, other companies are continually trying to compete with their low prices, causing the company to find new ways to lower prices. There is constant pressure on the corporation to buy massive quantities to keep their stores stocked and prices low.
In spite of these difficulties, however, Walmart remains a powerful market force in every geographical area that they do business in. The addition of the market stores has added additional opportunities for the corporation to attract new customers, and the buying process for food items has created new, lower price point products.
Once known only for their ‘it’s not IBM’ computers, Apple has grown into a major electronics company that offers everything from personal electronics to televisions. Offering innovative products and creating a network of services that work together, Apple has developed some of the world’s most daring technology. Through their business model of innovation and design, they have branded their company as the forerunner in marketing, service and sales.
Apple has a multi-faceted differentiation strategy. They are innovators who constantly push the limits of products and services, a strategy that is hugely successful. In addition, they are relentless in the pursuit of excellent customer service. Finally, they capitalize on the brand itself, which has become a part of the culture through their advertising campaigns and product placement.
Drivers of Success/failures
One of the most successful drivers of Apple’s strategy is the creation of their own ‘ecosystem’. The Apple line is designed to integrate among other Apple products, seamlessly sharing media across devices. This ecosystem provides users with the ability to share their music files from their iPod to their iPhone to their PC or Apple TV. Leaving the ecosystem would not only be costly, it would be cumbersome to try to assimilate the same ease of use – a fact that Apple uses to their advantage.
Another important driver of success is the innovation that Apple has continued to demonstrate. With constant release of new, advanced offerings, Apple has maintained their position as the leader of the technology market and can draw thousands to their door in anticipation of the release of a new product. To wield that power, it is evident the company has mastered the art of the customer hook. Through skillful advertising and branding, Apple has set the standard for other technology companies to follow, though few have managed to come close to their level of success.
Interestingly, another aspect of Apple that has led to its overwhelming success is the company’s willingness to fail. There have been several ‘bad Apples’ in the line of Apple products: MobileMe, and Ping, for example. These services were not well received and did not perform well in the Apple lineup, so Apple pulled them from their offerings. The company shows little resistance to pulling these ‘failures’ from the market, but doesn’t hesitate to find better use for their technology. The technology was reused and repacked, finding its way into the iTunes market and as part of the basis for ‘the Cloud’. By being willing to fail, Apple demonstrates their commitment to finding new ways of solving problems.
Athletic gear provider Nike is considered the premier athlete supplier for serious athletes. Their products include athletic footwear, workout and performance clothes as well as athletic accessories such as gym bags, headbands, balls and more. Their business model is simple: offer high quality sports materials and customers will be willing to pay higher prices.
Nike’s differentiation strategy is to establish the company as the standard in athletic wear. By focusing on their product line, they are able to produce high quality products that meet customer expectations. Nike’s product line is not wide: they offer athletic shoes, workout clothes and a very limited number of additional products. Their focus is clear: give the athlete the equipment they need to succeed. This single-minded focus has allowed them to develop efficient networks of suppliers and manufacturers who can provide high quality materials.
Drivers of success/failures
The most prominent driver for Nike’s success is their distinctive marketing strategy. Nike has established itself not only as a leading brand for athletes, but also as a leading fashion brand. Through identification with athletes, customers are compelled to purchase their athletic wear for competitive and recreational use.
Another driver of success is their commitment to research and development. Within the athletic market there is a high level of competition. To remain a leader in the industry, Nike must constantly be innovating with new and improved tools to help the athlete perform at their peak. Improved athletic wear, the partnership with Apple for fitness training, the ability to personalize workout shoes are all examples of the innovative products that Nike has developed. By maintaining this level of innovation, Nike will be constantly in the front of the competition.
One area that could become a driver of failure is the higher price point of Nike’s products. The availability of other options in the athletic wear department gives customers the opportunity to select a product based on price rather than options. For the cost-conscious customer, the choice will almost always be a company other than Nike. To retain their foothold in the market, Nike must establish a way to lower production costs and offer their lineup of products at a lower cost.
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