Focus differentiation competitive strategy

Differentiation as a source of competitive advantage for a focus competitive strategy can be defined as the activities that small businesses undertake to add value to products and services in order to distinguish them from the competition (Thompson and Martins, 2010:198). These differences should be unique and valued by customers (Teeratansirikool et

al., 2013:170; Hsieh and Chen, 2011:14). The more unique the product or service, the more sustainable the competitive advantage becomes (Thompson and Martin, 2010:202).

Products and services must be differentiated to such an extent that customers will be willing to pay more for these offerings (Jooste et al., 2012:231). The purpose of differentiating a product or service is to generate brand or customer loyalty that will establish price-inelastic demand (Salavou, 2015:82; Hsieh and Chen, 2011:14); which means that an increase in price will have a minimal effect on the quantity demanded by customers. Price-inelastic demand leads to higher profit margins, as customers are not sensitive to price increases and will not refrain from purchasing the product or service when the price escalates (Salavou, 2015:82).

Businesses competing with a focus differentiation strategy can enjoy success, as long as the unique features of the product or service are constantly upgraded to create new differentiating features (Porter, 2008:14).

a) Factors that influence the success of the focus differentiation competitive strategy

Louw and Venter (2011:299) identify several factors that influence the success of differentiating products or services, namely whether a business has a clear understanding of its customers’ and competitors’ behaviour, knowing what customers deem as valuable and to what extent customers are willing to pay for the differentiated products or services. Both the market environment and the characteristics of the product or service must be considered before managers can decide to use differentiation as a source of competitive advantage. Differentiation is best suited when:

 the market is characterised by diverse customer needs,

 there are a small number of competitors in the market who follow a similar strategy,

 the entry barriers to the market are high,

 customers are less price-sensitive,

 brand loyalty exists and customers will not readily change to a different brand,

 customers value the unique characteristics and features of the product or service (Lazenby, 2014:166).

Therefore, differentiation is best suited for a dynamic and uncertain environment that involves new technologies, and unpredictable customer demand and competitor behaviour.

In a dynamic and uncertain environment, managers should emphasise flexibility to ensure that the business can adapt to change (Parnell, 2013:217; Hsieh and Chen, 2011:14). Leitner and Güldenberg (2010:169) studied the performance of small businesses that implemented Porter’s generic competitive strategies and found that for these businesses, the most suitable competitive advantage was the ability to respond flexibly to market needs. Many researchers (Parnell, 2013:217; Bressler, 2012:3; Box and Miller, 2011:58; Leitner and Güldenberg, 2010:171) agree that due to the limited resources and flexibility of small businesses, they should compete by employing a focus differentiation strategy. Therefore, when competing against large businesses, a small businesses’ competitive advantage more often lies in its ability to be flexible, rather than to gain on economies of scale.

b) Methods to differentiate products and services

According to Porter (2008:14), numerous methods can be used by small businesses to differentiate their products and services. These methods mainly include superior quality, branding, distribution channels and other unique characteristics, such as the latest technology (Hsieh and Chen, 2011:14; Thompson and Martin, 2010:197; Flint and Golicic, 2009:845). The quality of a product or service is usually evaluated through performance, durability and reliability, and these characteristics are difficult to evaluate when a customer is purchasing the product or service (Thompson and Martin, 2010:197). Having a reputation for high quality products and services is a method of creating a competitive advantage (Su, Linderman, Schroeder & Van de Ven, 2014:429). Customers evaluate the quality of the product, based on their perception of the product. If the product appears to be of high quality, customers usually assume that the performance, durability and reliability will be of an acceptable standard - and as a result they are willing to pay a higher price (Jooste et al., 2012:232). Services can be differentiated in terms of quality through superior staff skills, friendliness and helpfulness (Lazenby, 2014:165). A small business can differentiate its offering from the competition by ensuring that their products and services are of a higher quality, for example, a small retail clothing store that specialises in creating traditional African wear and uses only 100% cotton. Such a store differentiates itself from its competition by its use of high quality material.

Branding is another method of differentiation. This entails that businesses name their products or services in order to gain an identity and project an image, and to ultimately position such offerings in the minds of customers (Louw and Venter, 2011:300). Through branding, competitive products or services are distinguished from others and are provided with specific symbolic value. Thus, the competitive advantage achieved lies in the image of the product or service (Flint and Golicic, 2009:845). For example, a small plumbing business known for its ability to fix complex plumbing problems, is likely to be the first choice of customers when they experience a plumbing problem. By providing excellent service and being able to repair the majority of problems, such a business can build a good reputation and so differentiate itself from its competitors.

The distribution channel can also be used to differentiate a business from its rivals.

Businesses can select a distribution channel that is focused on providing customers with products swiftly, or providing products at the lowest possible cost. A business can gain a competitive advantage by employing either a more responsive or a more cost-efficient distribution channel (Thompson and Martin, 2010:197; Flint and Golicic, 2009:845). For example, if a small courier business strives to differentiate itself by providing customers with the shortest possible delivery time, the courier must ensure that its distribution channel is equipped to be responsive, which can be achieved by selecting the fastest mode of transport.

Unique characteristics as a way to differentiate a business from its competitors, refer to products or services that have distinguishable characteristics or features compared to those offered by competitors. The unique characteristics of the product or service may even justify a higher price (Jooste et al., 2012:235). However, maintaining a sustainable competitive advantage through unique characteristics (and features) is difficult, as competitors are quick to imitate such unique features (Jooste et al., 2012:234; Thompson and Martin, 2010:197).

With reference to the previous example of the small bakery that adds expensive imported herbs and spices to its bread (section 2.3.2); it is almost certain that some competitors will promptly imitate the unique product.

Small businesses can use one or a combination of the above methods of differentiation to create a competitive advantage. In the next section the second source of competitive advantage for a focus competitive strategy, namely low-cost, is discussed.