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The Role of differentiation in markets driven by advertising

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Creating differentiation is an accepted mantra of strategic management and marketing. In fact, differentiation is defined as one of three or four generic strategies that an organization must pursue in order to sustain long-term competitive advantage and profits (Porter 1991, 1996). Assuming that differentiation makes a product better for some consumers and worse or less suitable for others, the author's analysis suggests a strong caveat to the wisdom of blindly pursuing differentiation. Demand in many markets is strongly related to product awareness. The primary tool that is used to create awareness is advertising in mass media such as television, radio and print. This is true of most packaged goods markets and for much of the consumer-oriented service sector (e.g. fast-food restaurants). An obvious but ignored effect of advertising is that it endogenously creates groups of consumers based on the combination of brands that they are aware of. Of course within any of these groups, there are a range of preferences for the different attribute levels that might be found in the market. A consumer who is aware of several brands in a market will compare the options that she is aware of and choose the product that suits her best. In contrast, a consumer who has seen but one brand's advertising becomes a captive consumer of that brand. As noted above, within this group, there are significant differences in the amount that consumers are willing to pay. When firms take action to increase the differentiation between their products, these differences will be higher. The greater are these differences, the lower the price a firm must charge in order to maximise profit from the consumers who have only seen one firm's advertising. As a result, as long as advertising levels are not too high, firms may actually suffer when they increase the level of differentiation between products. Having highly differentiated products reduces the ability of competitive firms to capitalize on the segments over which they have monopoly-like power. When awareness is the primary generator of demand and the average awareness of all brands is not too high, the path to higher profits might be to market a product that is as widely acceptable as possible.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp2002/2002-86.pdf

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Copyright INSEAD. All rights reserved