Product differentiation is a marketing strategy distinguishing a product or service from competitors (Abdulwase et al., 2020). Product difference creates a competitive advantage that makes customers think the product is better than others. Customer perceptions determine product differentiation. Marketing, branding, quality, design, functionality, and customer experience can affect customer perceptions. Positive consumer perceptions boost brand loyalty, customer retention, and premium pricing for distinctive products.
Categories of product differentiation
Vertical Differentiation: This is differentiating a product by consumer value. High-quality products may command a premium, for instance, a luxury vehicle brand promoting its performance and craftsmanship over established ones (Hoskins et al., 2020). Vertical Differentiation Bases may include performance, emphasizing features and functions that improve performance. Second, quality. Emphasizing better materials, structure, and durability to convey product quality.
Horizontal Differentiation: Products are differentiated by their distinct qualities, not their quality, compared to competitors (Tynchenko et al., 2019). Horizontal differentiation addresses consumer preferences; for example, smartphones come in different sizes and colors to suit individual tastes. Horizontal differentiation bases include the design and variety of a given product.
Mixed Differentiation: Mixed differentiation combines vertical and horizontal differentiation. To attract more customers, the product is marketed as exceptional and distinctive. This method uses quality and diversity to obtain an edge. Mixed differentiation bases include features and brand image of a product.
Relationship between product differentiation and managerial creativity
Product distinction and managerial inventiveness are linked. Managers must be creative to find and create market-differentiating product attributes. Understanding client demands, creating novel ideas, and turning those ideas into product features requires creativity. Marketing techniques that convey the differentiated value proposition to clients require ingenuity. It entails generating engaging campaigns, brand stories, and marketing platforms to reach the target audience.
Strategic flexibility
Strategic flexibility is a company’s capacity to adjust to business developments. It entails quickly altering the company’s strategy, structures, procedures, and resources to changing market conditions, technical advances, competition threats, or other unanticipated developments (Kornelius et al., 2020). Strategic flexibility is a third generic business-level strategy since it supports cost leadership and differentiation and helps a corporation to adapt to changing market conditions, unlike cost leadership and distinctiveness.
Strategic options
Strategic options are pre-defined future business strategies. These alternatives give the company’s strategic decision-making process flexibility and adaptability and can be activated or discarded when specific triggers or criteria are met. Strategic choices enable management to handle different company conditions and possibilities without devoting all resources. Instead of making irrevocable decisions, the corporation generates a portfolio of strategic options to pursue or abandon depending on the business situation.
Real options
Real options in business strategy are the right but not the responsibility to pursue future company or investment prospects. They allow management to adapt to new information and market situations. These choices let a corporation postpone significant investment or strategy decisions until uncertainties are resolved or more information is available. Thus, the corporation can wait for good conditions or exploit opportunities before committing resources. Real choices include entering new markets, producing new goods, forming strategic collaborations, acquiring another company, or selling underperforming assets.
Collusion
Two or more corporations collude to manipulate the market, control prices, or limit competition. Collusion involves competitors making secret deals to acquire an unfair edge. Collusion weakens free and open markets, where competition drives efficiency, innovation, and customer-fair pricing (Label, 2021).
Types of collusion
Explicit Collusion: Companies enter into legal arrangements to coordinate their operations and manipulate the market under this collusion. The joint secret agreements are price-fixing, market allocation, bid-rigging, and output limits. Price-fixing, a kind of explicit collaboration, eliminates price competition and artificially raises prices.
Tacit Collusion: Also known as implicit collusion, it is more subtle and does not entail formal agreements or contracts between competitors. Instead, tacitly colluding firms use signals and understandings to coordinate pricing and conduct. This type of collusion is common in industries with few rivals, significant market concentration, or low-price transparency. Mirroring pricing adjustments or avoiding price competition may indicate tacit coordination. Formal agreements distinguish explicitly from tacit collaboration. Explicit collusion involves explicit agreements, while tacit collusion is unspoken collaboration.
How does signaling relate to collusion?
Tacit collusion is strongly related to signaling. Competitors may express their intentions and strategies without formal coordination. These signals encourage competitors to cooperate, reducing competition where price signaling prevents extreme price cuts and price wars by enterprises communicating their pricing objectives or floors. If one company raises prices, others may implicitly agree to keep prices high. Competitors advertise their intended production to avoid overproduction and excess supply, which helps keep prices high. Signaling aligns competitors, undermines fair competition, and harms consumers and the market.
Vertical integration and the difference between forward and backward vertical integration.
Vertical integration is a growth strategy in which a corporation takes over or buys production and distribution chain services. Reducing external supplier dependence improves supply chain management by increasing control, efficiency, and cost savings (Chen et al., 2023). Forward vertical integration brings companies closer to customers by managing “downstream” procedures like wholesale and retail sales.
Forward vertical integration occurs when a smartphone manufacturer sells its own devices at retail, while backward vertical integration brings a company closer to its suppliers. Owning suppliers or crucial production components helps companies control product quality, supply chain risks, and inputs. For example, smartphone manufacturers can buy chip suppliers to ensure a consistent supply and lower production costs. Vertical integration eliminates wasteful suppliers and expensive transactions, and thus, businesses can save money, improve efficiency, and eliminate intermediaries by managing several supply chain points.
How vertical integration can create value and how value is created under each
Integration improves output and collaboration through customer retention, public image, and market competitiveness. Monitor the supply chain for quality issues. Vertical integration decreases risk by reducing outside dependence and can improve market and supply disruption management. Controlling raw material sources and distribution networks offers a stable foundation. Vertical integration lowers risk, improves coordination, quality, and prices, and strategic supply chain integration improves operations, market position, and performance. Vertical integration should assess benefits and risks. In today’s competitive business environment, vertical integration may be beneficial.
Reasons firms can create value through vertical integration over competitors.
Vertical integration works in competitive marketplaces where visionary companies have used this strategy to win. Vertical integration can add value for various main reasons. Innovative procedures, proprietary information, exclusive patents, and well-trained workers set some companies apart (Li et al., 2021). Vertical integration optimizes the value chain, lowering prices and improving quality. Technology companies with strong R&D can backward integrate to reduce their dependency on third-party manufacturers and stabilize output by consolidating their component supply.
Vertically integrated companies handle vital inputs. In-house vital inputs reduce price volatility and shortages, and with this authority, corporations can outperform competitors who use external sources by taking advantage of better terms, economies of scale, and faster market responses. Vertical integration also boosts brands and competition, controlling more of the value chain, exceeding customer expectations, and building brand loyalty. Thus, vertically integrated companies have a competitive edge.
References
Abdulwase, R., Ahmed, F., Nasr, F., Abdulwase, A., Alyousofi, A., & Yan, S. (2020). The role of business strategy is to create a competitive advantage in the organization. Open Access J Sci, 4(4), 135–138.
Chen, X., Wang, C., & Li, S. (2023). The impact of supply chain finance on corporate social responsibility and creating shared value: A case from the emerging economy. Supply Chain Management: An International Journal, 28(2), 324-346.
Hoskins, J., Verhaal, J. C., & Griffin, A. (2020). How within-country consumer product (or brand) localness and supporting marketing tactics influence sales performance. European Journal of Marketing, 55(2), 565-592.
Kornelius, H., Bernarto, I., Widjaja, A. W., & Purwanto, A. (2020). Competitive strategic maneuverability: The missing link between strategic planning and firm’s performance. International Journal of Advanced Science and Technology, 29(3), 7413-7422.
Li, P., Tan, D., Wang, G., Wei, H., & Wu, J. (2021). Retailer’s vertical integration strategies under different business modes. European Journal of Operational Research, 294(3), 965-975.
Lobel, O. (2021). Boilerplate Collusion: Clause Aggregation, Antitrust Law & Contract Governance. Minn. L. Rev., 106, 877.
Tynchenko, V. S., Fedorova, N. V., Kukartsev, V. V., Boyko, A. A., Stupina, A. A., & Danilchenko, Y. V. (2019, August). Methods of developing a competitive strategy of the agricultural enterprise. In IOP Conference Series: Earth and Environmental Science (Vol. 315, No. 2, p. 022105). IOP Publishing.
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