Differentiation in business refers to the act of marketing a particular product or service in a way that makes it stand out against other products or services. At the core, all differentiation strategies attempt to make a product appear distinct.
Businesses use competitor differentiation to stand apart from their competitors. The intent of doing this is to give a business a competitive edge in the marketplace. For example, a fast-food chain might specialize in healthy foods rather than typical high-fat offerings. Then, that chain would promote the nutritional value of its menu.
Many businesses will produce several similar products. For example, one company might produce many brands of dish soap. Product differentiation allows the company to distinguish each of the products from one another so they can be marketed in different ways to different people.
Companies use competency differentiation to emphasize their core competencies. For example, a company might differentiate itself as being the most technologically advanced company in its industry.