Differentiation Advantage

• The nature of differentiation

• Differentiation and segmentation

• Analyzing differentiation: the demand side

• Analyzing differentiation: the supply side

• Bringing it all together: value chain analysis

OUTLINE

The Nature of Differentiation

TOTAL CUSTOMER RESPONSIVENESSdifferentiation not just about the product, it embraces the whole relationship between the supplier and the customer.

INTANGIBLE DIFFERENTATIONUnobservable and subjectivecharacteristics relating to image,status, exclusively, identity

TANGIBLE DIFFERENTATIONObservable product characteristics

• size, color, materials, etc.• performance• packaging• complementary services

DEFINITION: Providing something unique that is valuable to thebuyer beyond simply offering a low price. (M. Porter)

THE KEY IS CREATING VALUE FOR THE CUSTOMER

Differentiation and Segmentation

DIFFERENTIATION: is concerned with how a firm competes within a market.SEGMENTATION: is concerned with where a firm competes within a market.

Does differentiation imply segmentation?Not necessarily, depends upon the differentiation strategy:BROAD SCOPE DIFFERENTIATION: Appealing to what is in common between different customers (McDonalds hamburgers, Honda cars, Sears)FOCUSED DIFFERENTIATION: Appealing to what distinguishes different customer groups (BMW, Doc Marten footwear)

Differentiation vs. Cost Leadership as a Basis for Sustained Competitive Advantage

Highest returns to shareholders among the Fortune 200, 1990-2000 Av. annual return (%) Av. annual return (%)

Cisco Systems 73.4 Microsoft 35.4 Oracle 65.1 Safeway 35.2 Solectron 61.7 Freddy Mac 34.8Dell Computer 56.9 Washington Mutual 34.4Best Buy 51.3 J.P. Morgan Chase 33.3Applied Materials 49.8 Pfizer 32.1Sun Microsystems 45.2 Lowe’s 31.6Merrill Lynch 41.1 Enron 31.3CitiGroup 40.8 Walgreen 30.7 Intel 38.2 Wells Fargo 30.1Goldman Sachs 38.2 Cigna 30.0General Dynamics 38.1 Cardinal Health 29.6 Texas Instruments 36.3 Tech Data 29.4UnitedHealth Group 35.7 Houshold International 29.4

QUESTION: Which is the primary basis for competitive advantage in the above companies: cost or differentiation?

Differentiation and the Product Life Cycle

New packages of hardware and software introduced

SYSTEMAugmentation: repackaging of hardware and

software

PRODUCTS & SERVICES

DecommoditizationCOMMODITY

PRODUCTS & SERVICES

Commoditization

Desystematization: some packages

unbundled

Analyzing the Demand Side

Techniques for analyzing product attributes andpositioning:

• Multidimensional Scaling• Conjoint Analysis• Hedonic Price Analysis

Differentiation in Pain Relievers: Multidimensional Scaling of

Competing Products in the U.S.High

Low

Low High

EFFECTIVENESS

GENTLENESS

Tylenol

Bufferin

Excedrin

Bayer

AnacinPrivate label aspirin

Identifying Differentiation Potential: The Demand Side

THE PRODUCT

THE CUSTOMER

What needs does it satisfy?

By what criteria do

they choose?

What motivates

them?

What are key attributes?

Relate patterns of customer

preferences to product attributes

What price premiums do

product attributes command?

What are demographic, sociological,

psychological correlates of

customer behavior?

FORMULATE DIFFERENTIATION STRATEGY

• Select product positioning in relation to product attributes

• Select target customer group

• Ensure customer / product compatibility

• Evaluate costs and benefits of differentiation

SYSTEM PRODUCT

SERVICE COMMODITY

SUPPORT(SOFTWARE)

Differentiated Undifferentiated

DifferentiatedMERCHANDISE(HARDWARE)

Undifferentiated

Differentiation of Hardware and Software

Consistency of Differentiation Strategy: Product Integrity

Key to successful differentiation is consistency of all aspects of the firm’s relationship with its customers.

Product Integrity: the total balance of product features• Internal integrity: consistency between

function and structure• External integrity:fit between the product

and the customers’ objectives, values, lifestyle etc..

Producer’s strategiesHigh quality Low quality

High 7 10Consumer’s price 7 -5strategies

Low -5 3 price 10 3

Note: In each cell, the lower left number is the payoff to the consumer and the upper right number is

the payoff to the producer.

The problem of experience goods : quality can only be ascertained after purchase. Hence: Prisoner’s Dilemma:-

Equilibrium reached with consumer paying a low price for a low quality item.If producer can signal quality--- both consumer and producer can move to preferred position: high quality product carrying a high price

Problem of Quality in Experience Goods: A “Prisoner’s Dilemma”

The Impact of Quality on Profitability

Low 25% 60% High

Relative market share

Rel

ativ

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oduc

t qua

lity

Low

33

%

67

%

Hig

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Rel

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oduc

t qua

lity

Low

33

%

67

%

Hig

h

Rel

ativ

e pr

oduc

t qua

lity

Low

33

%

67

%

Hig

h

Low 25% 60% High

Relative market share

Low 25% 60% High

Relative market share

ROI (%) Relative Price Relative Direct Cost

Conclusion: Increases in quality add more to price then they do to cost.

19 28 38 107 107 108 104 103 101

14 20 28 103 104 104 104 102 100

7 16 23 101 101 102 104 102 100

Using the Value Chain to Identify Differentiation Potential on the Supply Side

FIRM INFRASTRUCTURE

HUMAN RESOURCE MANAGEMENT

TECHNOLOGY DEVELOPMENT

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS & SALES

MIS that supports fast response capabilities

Training to support customer service

excellence

Unique product features. Fast new product

development

Quality of components &

materials

Defect free products.

Wide variety

Fast delivery. Efficient order

processing

Building brand reputation

Customer technical support. Consumer credit. Availability of

spares

Identifying Differentiation Opportunities through Linking the Value Chains of the Firm and its

Customers: Can Manufacture

1. Distinctive can design can assist canners’ marketing activities.

2. High manufacturing tolerances can avoid breakdowns in customer’s canning lines.

3. Frequent, reliable delivery can permit canner to adopt JIT can supply.

4. Efficient order processing system can reduce customers’ ordering costs.

5. Competent technical support can increase canner’s efficiency of plant utilization.

Supplies of steel&

aluminum

Service &

technical support

Sales

Distribution

Inventory holding

Manufacturing

Design

Engineering

Inventory holding

Purchasing

Distribution

Marketing

Canning

Processing

Inventory holding

Purchasing

CANNER CAN MAKER

1

2 45

3