Differentiation in Economics
The concept of differentiation originated in economics and has been taken over by marketing departments. At its heart lies the ability of sim- ilar products to be differentiated by real or imaginary means, thus enabling them to be sold at a higher price and profit.
This differentiation can take real forms (soluble aspirin as against non-soluble aspirin, for example) or imaginary forms (by advertising that suggests one perfume makes you more attractive to the opposite sex than another). The value of differentiation increases the more that products come to resemble each other. For example, washing machines and airline flights vary less and less as time goes by, and it becomes a bigger and bigger challenge to differentiate one from another.
Once a distinction has been established, however, it can be reaffirmed for years and years. Porsche, for example, differentiates itself as being a fast-moving sports car for fast-moving high-fliers, and has done at least since James Dean, a film actor, happened to die in one in 1956. In consumer-goods industries it is common for a large number of differentiated products to be produced by quite a small number of firms. For example, most of the seemingly wide range of soaps and detergents in the United States are produced by just two firms, Unilever and Procter & Gamble.
In commodity markets, such as oil and coal, there is little or no scope for differentiation. These industries also have low returns on investment. In industries where there is scope for differentiation, there is a far wider range of returns. Service businesses differentiate themselves in different ways from manufacturers. Airlines rely both on their products (“our fleet is newer than blah blah’s”) and on their personnel (“our flight attendants are prettier and more attentive”). This does not work with products (“our chickens have been plucked by people with cleaner hands”).
Brand image is another way of differentiating products. This is particularly powerful in the fashion industry, where it is hard to argue that “our clothes last longer than xxx’s” or that “we have better taste than xxx”. It is also significant in the tobacco industry, where one cigarette is so much like another.
Marketers maintain that most products can be differentiated in some way. Philip Kotler, a marketing guru, gives the example of the brick industry, which is about as close to a commodity business as it is possible to be. Yet one company in the industry was able to differentiate itself dramatically by altering its method of delivering bricks. Instead of dumping them on the ground (and breaking a bundle), it stacked them together on pallets and used a small crane to lift them gently off the truck. So successful was the firm with this method that before long it became standard industry practice. The firm then, of course, had to look for a new way of differentiating itself.