What does "differentiation" mean in competitive strategy?

In the context of competitive strategy, "differentiation" refers to the process of developing distinct products or services that are perceived as unique by consumers compared to those offered by competitors. This uniqueness can stem from various factors such as superior quality, innovative features, design, customer service, or brand reputation. By successfully differentiating their offerings, companies can create a competitive advantage, attract a loyal customer base, and often command higher prices because customers are willing to pay a premium for products they see as better or different.

In contrast, merely offering products identical to competitors does not involve differentiation and would likely lead to price competition, which is not the focus of a differentiation strategy. Reducing prices below competitors could indicate a cost leadership strategy rather than differentiation, which focuses on added value rather than lower costs. Lastly, focusing solely on cost leadership ignores the critical aspect of product uniqueness that defines differentiation.