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154 PART 2 • STRATEGY FORMULATION

leadership strategy easily will defeat a differentiation strategy. Another risk of pursuing a
differentiation strategy is that competitors may quickly develop ways to copy the differen-
tiating features. Firms thus must find durable sources of uniqueness that cannot be imitated
quickly or cheaply by rival firms.
Common organizational requirements for a successful differentiation strategy
include strong coordination among the R&D and marketing functions and substantial
amenities to attract scientists and creative people. Firms can pursue a differentiation
(Type 3) strategy based on many different competitive aspects. For example, Mountain
Dew and root beer have a unique taste; Lowe’s, Home Depot, and Wal-Mart offer wide
selection and one-stop shopping; Dell Computer and FedEx offer superior service; BMW
and Porsche offer engineering design and performance; IBM and Hewlett-Packard offer a
*
wide range of products; and E Trade and Ameritrade offer Internet convenience.
Differentiation opportunities exist or can potentially be developed anywhere along the
firm’s value chain, including supply chain activities, product R&D activities, production
and technological activities, manufacturing activities, human resource management activ-
ities, distribution activities, or marketing activities.
The most effective differentiation bases are those that are hard or expensive for rivals
to duplicate. Competitors are continually trying to imitate, duplicate, and outperform rivals
along any differentiation variable that has yielded competitive advantage. For example,
when U.S. Airways cut its prices, Delta quickly followed suit. When Caterpillar instituted
its quick-delivery-of-spare-parts policy, John Deere soon followed suit. To the extent that
differentiating attributes are tough for rivals to copy, a differentiation strategy will be espe-
cially effective, but the sources of uniqueness must be time-consuming, cost prohibitive,
and simply too burdensome for rivals to match. A firm, therefore, must be careful when
employing a differentiation (Type 3) strategy. Buyers will not pay the higher differentia-
tion price unless their perceived value exceeds the price they are paying. 23 Based on such
matters as attractive packaging, extensive advertising, quality of sales presentations,
quality of Web site, list of customers, professionalism, size of the firm, and/or profitability
of the company, perceived value may be more important to customers than actual value.
A Type 3 differentiation strategy can be especially effective under the following
conditions: 24

1. When there are many ways to differentiate the product or service and many buyers
perceive these differences as having value.
2. When buyer needs and uses are diverse.
3. When few rival firms are following a similar differentiation approach.
4. When technological change is fast paced and competition revolves around rapidly
evolving product features.

Focus Strategies (Type 4 and Type 5)
A successful focus strategy depends on an industry segment that is of sufficient size, has
good growth potential, and is not crucial to the success of other major competitors. Strategies
such as market penetration and market development offer substantial focusing advantages.
Midsize and large firms can effectively pursue focus-based strategies only in conjunction
with differentiation or cost leadership–based strategies. All firms in essence follow a differ-
entiated strategy. Because only one firm can differentiate itself with the lowest cost, the
remaining firms in the industry must find other ways to differentiate their products.
Focus strategies are most effective when consumers have distinctive preferences or
requirements and when rival firms are not attempting to specialize in the same target segment.
Sara Lee Corp. is pursuing a focus strategy as it is trying to divest of its European household
and personal-care business so the firm can focus on its core food and beverage business. The
company is asking about $2 billion for its household business. Sara Lee sells Jimmy Dean
sausages and Ball Park Franks and a mix of coffee and baked goods. Possible bidders for its
household business are Unilever PLC, Johnson & Johnson, and Colgate-Palmolive.
Risks of pursuing a focus strategy include the possibility that numerous competitors
will recognize the successful focus strategy and copy it or that consumer preferences will
drift toward the product attributes desired by the market as a whole. An organization using