Manufacture Differentiation Needs

Your Capability and Your Intelligence

Introduction

Differentiation can relax competition is a classical economic theory, while there are several ways to use this strategy. This paper gives a classification of differentiation according to diversified object, and compares each class, then gives a qualification and suggestion to practice this theory. The examples in this paper are also fresh and interesting.

1.       introduce the existing theories about differentiation

Differentiation competition strategy of manufacturing enterprises is an efficient strategy in harsh market competition. In the competitive markets, all the products are the same, entrepreneurs make zero economic profit for companies can entrant this market freely. A monopoly company can get positive profit because its product is unique, its price is higher than the market equilibrium price. Because the law of antitrust and the prosperity of economy, fewer companies can be as monopolies. The strategy of differentiation can relax price competition, make manufactures unique, classify consumers, help the company to be as a monopoly competitive company , as to get more profit than be in a competitive market. In the classical economic academic paper < Relaxing Price Competition Through Product Differentiation>(1), professor AVNER SHAKED and JOHN SUTTON have already give the mathematical theory to testify that in the monopolistic competition market equilibrium is that the companies will to choose differentiated products especially if there are only two entrants, and all of them will make positive profits.

What to get more profit? Of course differentiation is a perfect advice.

2.   the three main ways to differentiation manufacture

There are several ways to differentiation manufacture, here I analyze the three main ways: product, management and service differentiation.

Product differentiation, companies specialize their products to make them more attractive to a target market. Companies can differentiating products from their competitors’ as well as their own manufactures. For instance, McDonald’s mainly provide hamburgers and fried chicken. Well, cheeseburger, double hamburger, big mac, Filet-O-Fish are all hamburgers contained with different stuffing. Without so many different kind of hamburgers fewer customers will having dinner there. Compared with KFC’s chocolate and strawberry Sundae, McDonald’s supply chocolate and strawberry shake. Both of them have the capability to provide all of these goods, but they diversify their products. Why they choose to make this little difference? Because they are in a game, in the strategy of differentiation they can classify consumers according to they prefer shake or Sundae. Then they can be a monopoly in the corresponding market. Or if they supply the same food, they are in the prisoners’ dilemma which means they have to fix a price as low as possible, for as long as KFC fixes a lower price, nobody will buy McDonald’s food at a higher price. As a result they get zero economic profit in this competitive market. So they yield similar food while never produce the same food or they provide unique one, such as only McDonald’s has pie and only KFC supply corn.  Automobile industry has the same strategy, different car factories yield specialized function autos. Japanese cars concentrate on saving oil and perfect inside upholster. German cars are good at motor. Of course, they all manufacture varieties of figures which is the main method to satisfy consumers’ preferences. Insurance agents pay attention to product differentiation to relax their industry’s competition. Insurance agents provided large option for different kinds of people and different agents have different characteristic.(2) All these industries are using product differentiation. If they all choose the same product they will be in the competitive markets which means they make zero economic profit. A successful product differentiation strategy will move your product from competing based primarily on price to competing on non-price factors.(3)

Management differentiation is the second category. LV is representative, as you all know LV limited the quantity each consumer can buy each year. You can find a lot of people wanting outside LV’s store in Pairs to lend travelers passports in order to buy more bags of LV. Simultaneously, only six people can get into the store at the same time in order to content one worker service one consumer. Consequently its goods are shortage and luxury which help it to get a monopoly price and large profit. Otherwise although it can sell more products, the price will lower, LV will be in a competitive market like other normal brands. Actually LV use the theory of snob effect to make its manufactures limit and be as a symbolize of the owner’s identity and wealth. Luxury goods such as roadsters, customized boutique, art masterpieces are also in the same strategy. The less these luxury goods provide, the more people demand them. The high price is partly from the privilege, status, and exclusionist. They are using snob effect to differentiate their management and get a high price, actually the material they used is similar to normal companies. Banks also use management differentiation, all the banks doing finance business which means their products are homogeneous it’s impossible to diversify products, they choose to specialize management. In China, 招商bank mainly provide service about individual finance while construction bank pay attention to company business.(4)In this way their situation is better than management in the same way and get competitive price.  

Service differentiation

Service differentiation involves two general ways, different from companies and different from consumers. Two products are supplied by tourist agencies. Travel itineraries are external, the other is internal service. On account of Chinese immature exclusive law, there is little obstacle of imitating innovative traveling routes. Differentiation strategy in travel industry should be service differentiation. Banks not only different their service from other banks but also diversify their service according to different consumers. Banks’ service differentiation is established by the variety of consumers’ profit. The most popular way to classify is consumer pyramidal model.  To hierarchize consumers into four classes, platinum, gold, silver and common. (5)

While in the industry of hospital and physician service, “service mix and quality are the dominant instruments of competition in this industry"(6).

3.  Service differentiation is more superior

High qualified service is the guarantee of living in the business world. Customer service is important because without customers there would not be a business. Manufactures can be classified into four groups----A. pure physical product, B physical good with some service, C service chiefly plus few products, and D pure service. The more percentage service took the more profit a company will get. So no matter what products or what kind of management one company choose, it should pay large attention on its service.

Compared with other kinds of differentiation, innovating special service cost less. Because of the low qualification of diversify service, it is more easier to use. As well as product differentiation is simple to imitate such as in the travel industry, service differentiation is more reliable.

Service differentiation also helps to remedy the consumers' limitation of judging the quality of merchandise, especially in the industries of high technology. For consumers cannot justify a high technology product accurately without background knowledge. Oracle provide electronic business through internet, while maintaining the differentiation in service offerings(7)This strategy help Oracle to remedy its consumers’ justice.

Specialized service can help the company to establish reputation and accumulate consumers' faithfulness. Hair is the most significant example to emphasize on service and has a unique and good service compared with other electronic companies, which bring itself fame and higher profit.

4.  qualification of using differentiation and how to use it

First of all, differentiation is useful mainly in a monopoly competitive market. As a competitive company it is much harder for it to diversify its manufactures which cost a lot of money. Such as biscuit industry, little difference is appearing. Biscuit industry doesn’t need to concentrate on service because it sells goods through retailers.  The biscuit differences are minor; they can be merely a change in packaging or also include a change in advertising theme. But the main material of cookies changes little. It is difficult for competitive companies choose this strategy. On the contrary, monopoly competitive companies as well as oligopoly ones should pay more attention on differentiation. For they are in a game, without differentiation strategy they all will be in a condition of competitive and have zero economic profit.

Using the strategy of differentiation requires usually requires large advertising and production expenditures.(8) Of course not everyone has the ability to sell products in the way of LV does, management differentiation qualify the company’s reputation.

It should be difficult for other companies to imitate this differentiation. Or this strategy is no use, after you have advertised and give the consumers a signal that there is a new good, others produce this innovation freely with low cost and fix a low price. Tourism route for instance, it is impossible to specialize products in Chinese travel industry. Hence, companies should choose a differentiation strategy which costs a lot for other competitors to imitate or there is obstacle to copy it such as patent.

Now, here give a way to use differentiation. The aim of this strategy is to develop a position that customers will see as unique. Accordingly, it is important to find out consumer preferences and an efficient way to classify consumers. Banks category platinum clients who are loyalty to corporation, pay less attention to price while prefer trying innovations.(9)Many shopping malls provide consuming accumulative cards to find out the quantity one customer purchases. "We've done a store-by-store analysis of customer counts and loyalty," at Ames, Rocky Hill, Conn., new president and CEO Joseph Ettore said.

After classifying and understanding consumers’ preferences, the company should decide to choose a way to produce to make a unique product offering. Using the collected statistics and investigation companies can produce one manufacture satisfy an unique group of consumers or providing different products with diversified percentage to content most consumers. In the car industry, there are two groups of people, group A pay X1 attention on shape while Y1 on function, group B is X2 Y2. Suppose X1<X2, Y1>Y2. The car industry can pay X3 attention on shape while X2>X3>X1, to attract both two groups people. Or it can produce cars which pay X2 attention on shape to satisfy only group B(10)With the help of interactive media, it is more easier to personalize markets. Many internet sites help customers make choices by organizing information and prioritizing it based on the individual's preferences. Because the innovation of Information Technology (IT), product variety is more popular(11)

You need to do is to find out customers’ value. And if you can provide the certainty they need, by differentiating your product or service to meet their needs you can charge more. And there is an industry to help companies to differentiate manufactures such as Leading Edge. It identifies how companies can differentiate products or service to be able to charge a premium price(12)

5.    conclusion

   Differentiation is an efficient way to relax competition especially in competitive market and monopolistic competition market. There are three ways to diversify manufacture. Product differentiation is the easiest way and has the least obstacle to using it. Service specialization is the most important one which should be use as the main artifice or be as an assistant with other ones. Companies who use this strategy will enhance their reputation and famous but also have qualification first. They should understand consumers’ preferences and value, have a way to classify, with enough capital and reputation to unique their supply. Hereby, enterprises can charge more, get larger profit because competition relaxing through this strategy.