Final answer:
A differentiation strategy adds value by enhancing a product so it is perceived as superior to competitors'. This can be achieved through various methods of product differentiation, allowing a firm to stand out and potentially earn higher profits.
Step-by-step explanation:
A differentiation strategy adds value to a product by finding ways to make it better than a competitor's product. Product differentiation refers to any action that firms take to make consumers perceive their products as different from their competitors'. A firm can differentiate its products from those of its competitors in several ways, such as through the physical aspects of the product, the location from which it sells the product, intangible aspects of the product, and the perceptions of the product.
Firms often seek profits by innovating to create products with unique characteristics that consumers desire. A well-respected brand name, for example, can be the result of many years of consistent branding and product differentiation, contributing to a product's distinctiveness and appeal in the marketplace. This strategy generally allows firms to earn above-normal profits by setting themselves apart from the competition before they can catch up.