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Product differentiation

Product differentiation means that at any time a wide range of products will be offered to consumers. The differences will find expression in the types, types, styles, brands, quality levels of this product, packaging forms, which ensures satisfaction of the variety of consumer tastes. Product differentiation may find its manifestation in the production of substitutes and alternatives, such as sugar and its substitutes, tea and its alternative to coffee.

Differentiation of the product and the presence of competitors in the industry stimulates the improvement of the quality of this product and imparting to it certain unified characteristics that may be absent from the products of another company. This can strengthen the bargaining power of some manufacturers.

But in any case, the strength of the market power of one firm will be weakened by the presence of producers of similar goods and considerable freedom to enter the industry. Therefore, in the monopolistic competition industry, economic rivalry focuses not only on price, but also on such non-price factors as product quality, advertising, sales conditions, and various forms of sales promotion. In this case, the types of product differentiation take the form of non-price competition. All types of business or industry that operate under imperfect competition follow certain types of competitive strategies.

There are three basic types of competitive strategies: price leadership, differentiation, focusing (Table 9).

Table 9 -

basic characteristics of basic strategies

The price leader (a manufacturer capable of keeping product prices below market prices) chooses a low level of product differentiation and ignores market segmentation. It works for the average consumer, providing a lower price. The price leader is protected from future competitors with its price advantage. When substitute products enter the market, the price leader can lower the price and maintain market share. The advantage of the price leader is the presence of barriers to entry, as other companies are unable to enter the industry using the prices of the leader.
Thus, the price leader is in relative safety, as long as it retains a cost advantage. The principal danger for him is that competitors find ways to reduce their costs (for example, when technology changes).

The goal of the differentiation strategy is to achieve a competitive advantage by creating products or services that are perceived by consumers as unique. At the same time, companies can use a higher (premium) price. The advantage of the differentiation strategy is the safety of the company from competitors as long as consumers retain a steady loyalty to its products. This provides her with competitive advantages. Differentiation and wide customer loyalty create barriers to entry for other companies that need to do competitive development. Finally, substitute products can pose a threat only if competitors are able to produce products that satisfy consumers to the same degree and are capable of breaking steady loyalty to a differentiated company.

The main problem of such a company remains the maintenance of uniqueness in the eyes of consumers, especially in terms of imitation and copying. The threat may also arise from the changing needs and tastes of consumers.

Changes in production technology make the difference between pricing leadership and differentiation strategies less noticeable. Firms can implement differentiation policies at low costs.

Given this, some firms are trying to combine the benefits of price leadership and differentiation. They can set a premium price for their products compared to the price of the net price leader, but which will be lower than the net differentiator, which can provide them with greater profit than the companies that use pure basic strategies.

With a focusing strategy, a limited group of segments is selected. Having chosen a segment, the company uses either differentiation or low-price approach in it.

If companies do not clearly define their strategy, then, as a rule, they get results below average and suffer when competition increases.
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Product differentiation

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