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In articles one to five we covered the basics of strategic competitive advantage and how a firm(1) starts at the beginning of a strategic plan and defines its internal and external helpful and harmful aspects, through to understanding the resource based view (RBV) and competitive forces that affect the firm. These articles are all about the firm and how it will manage its resources and capabilities internally to meet the external competitive opportunities and threats that should deliver competitive advantage which [should] deliver profits.

In this article we will look at products and services(2) and how a firm identifies its approach the competitive markets. The mechanism to remember, is that whatever your strengths and weaknesses, they will be governed by the resource based view (see article 3 & 4) and whatever your opportunities and threats, which will be governed by competitive forces (see article 5).

Do firm’s products enter into a vertical or horizontal market? To give an insight I will show the comparisons of these markets.

Differentiation Strategies(3) Description
Vertical Firms offer products that will differ in category; consumers will forgo quality for lower prices.
Horizontal Firms offer different products; consumers will select products based on their preferences.

Vertical markets: Are a price verses quality market. Consumers of products know that some products are better in quality than others, but these consumers also know they have an overriding ‘price’ factor that they are willing to pay. The goal of a firm is to identify are they able to stake out a position of quality verses the competition, and then price the products appropriate to the quality that the consumer will accept. In vertical markets there is not a need to offer the very best products to be profitable, what is needed is a mix of price and quality that will appeal to your customers. However firms can influence their products through marketing, attention to detail, quality of materials, the way the products (or service) is provided, its branding, loyalty cards, reputation or even its technology.

Horizontal markets: In contrast these markets offer the very best and most desirable products in a market segment, they can even be niche markets. Serving these markets a firm has to believe that its products address the niche or desirable customer base instead of a broader product base, and that they will be profitable. For example, Rolls Royce is a firm that aspires to horizontal markets as it supplies high quality products; commands brand loyalty and subsequently high prices and high profits.

Below is an example(4) of differentiation in relation to a firms external competitive forces

Competitive Forces Vertical Differentiation Strategy Horizontal Differentiation Strategy
Competition Loyal customers will not be tempted by price differences.Safeguards against competition thru price points and how products are marketed Protects against rivals, as products are perceived to be unique.May not need to price match.Competing firms may focus on other niche markets
Buyers A firm has buyer power thru broader markets.More choice, more products deliver more buyer power. Offering niche products can secure buyer power, as there may be few substitutes.Consumers are not likely to switch product or demand price cuts.
Suppliers Can yield high margins thereby protecting a firm from supplier power (supply price increases). Suppliers can demand higher prices, but the firm’s niche market can absorb and pass on the cost.
Substitutes Have less to fear from substitutes, the broader market, so firms can change prices, keeping most customers. Niche markets are not broad and substitutes have less of an affect on them, as they are not unique.
Entry barriers Low barriers to competition, differentiation will be in loyalty and the influencing of the products and pricing. Unless entrants offer the same products, they are not a threat.New entrants may offer different products.

Summary.

Understanding how markets are differentiated will help you and your firms identify which differentiated strategy to address, as well as how to price the products that will meet the consumer demand and generate higher margin for the firm.

This article differs from the previous five in that we are migrating the learning of competitive advantage from the internal investigation of completing a SWOT, to externally understanding where your firm is going to be positioned in the market, and subsequently defining where your objectives and goals are, going forward. This will help you benefit from your competitive advantage, and providing your costs are controlled, deliver profits.

Footnotes:

1 The term ‘firm’ can be applied to any individual, groups, department or any institution.

2 The term ‘product(s)’ can mean actual products and/or services, tangible and/or intangible.

References:

3 Justin, J. (2014) ‘Comparisons of vertical and horizontal differentiation’ Cornell University

4 Justin, J. (2014) ‘Guide to vertical and horizontal differentiation’ Cornell University

 

‘Strategic Global Group (SGG) establishes your Competitive Advantage’.

Author: Phil Wilton has worked in MNC’s as well as developing start-ups and business expansion for SME’s. He received his MBA in International Business, Strategy, Marketing and Emerging Markets from the University of Liverpool. He also completed Business Strategy – Achieving Competitive Advantage at Cornel University.

Feel free to contact Phil (SGG) for a free intro consultation on how SGG can help your firm. philwilton@strategicglobalgroup.com 

All content © 2014. Permission to use with reference to author