Differentiation is the process in which cells with the same genome activate different sets of genes, make different proteins, and become specialised for particular functions.
A developing embryo can use morphogen concentration gradients as positional information: different concentrations activate different gene-regulatory pathways and produce different cell fates.
Causal chain: same genome → signal or morphogen concentration → selective gene activation → different proteins → specialised cell structure and function. Stem cells self-renew by mitosis and retain the capacity to differentiate along more than one pathway.
Differentiation changes gene expression, not the chromosome set. Self-renewal is the ability to keep dividing; potency is the range of specialised cell types a stem cell can produce.