CHAPTER 5

Differentiation Advantage

o Differentiation means providing unique value that allows a firm to command a premium price for its product or service (relies on the consumers’ willingness to pay more).

o There are four primary ways that companies differentiate their products from competitors:

DIFFERENTIATION

Superior Product

FeaturesBetter

Reliability Convenience Brand/Image

What is the source of differentiation

advantage?

Superior Product Features

Does a better job on existing features

Does more “jobs” than other products

Does a “unique” job that nothing else does

Better Quality/Reliability

More convenient to find, purchase,

use

Brand/Image

NORDSTROM

APPLE DYSON

APPLE FUJIFILM

DISNEY BUILD-A-BEAR

TOYOTA HONDA

STARBUCKS COCA-COLA

HARLEY JELL-O PRIUS

Sources of Differentiation Advantage

SOURCES OF DIFFERENTIATION ADVANTAGE

DIFFERENTIATION ADVANTAGES

o Differentiation strategies require a deeper understanding of the customer’s needs than cost-based strategies.

o This typically requires:• Customer segmentation analysis

• Consumption chain analysis

DIFFERENTIATION

• Differentiation can take many forms– Prestige or brand image– Technology– Innovation– Features– Customer service– Dealer network

VALUE-CHAIN ACTIVITIES: DIFFERENTIATION

Exhibit 5.5 Value-Chain Activities: Examples of DifferentiationSource: Adapted with the permission of The Free Press, a division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985 by Michael E. Porter.

DIFFERENTIATION

• Firms may differentiate along several dimensions at once

• Firms achieve and sustain differentiation and above-average profits when price premiums exceed extra costs of being unique

• Successful differentiation requires integration with all parts of a firm’s value chain

• An important aspect of differentiation is speed or quick response

DIFFERENTIATION: IMPROVING COMPETITIVE POSITION VIS-À-VIS THE

FIVE FORCES• Differentiation

– Creates higher entry barriers due to customer loyalty– Provides higher margins that enable the firm to deal

with supplier power– Reduces buyer power because buyers lack suitable

alternative – Reduces supplier power due to prestige associated

with supplying to highly differentiated products– Establishes customer loyalty and hence less threat

from substitutes

POTENTIAL PITFALLS OF DIFFERENTIATION STRATEGIES

• Uniqueness that is not valuable• Too much differentiation• Too high a price premium• Differentiation that is easily imitated• Dilution of brand identification through product-

line extensions• Perceptions of differentiation may vary between

buyers and sellers

EVALUATING SPEED AS A COMPETITIVE ADVANTAGE

• Speed-based strategies, or rapid response to customer requests or market and technological changes, have become a major source of competitive advantage for numerous firms in today’s intensely competitive global economy

EVALUATING A BUSINESS’S RAPID RESPONSE (SPEED) OPPORTUNITIES

POTENTIAL PITFALLS OF SPEED STRATEGIES

• Speeding up activities requires considerable attention to training, reorganization, and/or reengineering

• Some industries may not offer much advantage to the firm that introduces some forms of rapid response

• Customers in such settings may prefer the slower pace or the lower costs currently available, or they may have long time frames in purchasing

CUSTOMER SEGMENTATION

Definition

Customer segmentation is the analysis of customer needs to identify groups of buyers who are similar in the way they discriminate among (and value) product or service offerings

Objective

To identify a profit and market share maximizing strategy for each need-based customer segment to minimize:

- Over-satisfying some customer segment needs (excess financial cost)

- Under-satisfying others (market share cost)

SEGMENTATION OPPORTUNITIES

Different Ways to Segment the Market

Product Attributes

Features of the product

Customer Demographics

Attributes of the customer

Job-to-be Done

Attributes of the circumstance and

job to be done

Adapted from Clayton Christensen & Michael Raynor, The Innovator’s Solution

IDENTIFY KEY “JOBS-TO-BE-DONE” THROUGH CUSTOMER EMPATHY

AND DISCOVERY

Understand customer functional, social, and emotional

jobs-to-be-done

Empathy

Solution Job

What? Why?

“People don't want to buy a quarter-inch drill…

…they want a quarter-inch hole!" - Theodore Levitt

Get the job done by providing a solution that offers greater

simplicity, convenience, cost, and access

Discovery

Look for jobs that are important, unmet, and widely-held

SOMETIMES A MILKSHAKE……ISN’T JUST A MILKSHAKE

Functional Job: Yummy treat

Social Job: Appease my kids

Emotional Job: Commute companion

Milkshake

MAP THE CONSUMPTION CHAIN

Source: MacMillan and McGrath, “Discovering New Sources of Differentiation.”

How do consumers become aware of a need for your product/service?

How do consumers find your offering?

How do consumers make their final selections (priority of attributes)

How do consumers order and purchase your product?

How is your product/service delivered?

How is your product/service paid for?

How is your product stored/moved around?

What is your product really used for (what “job” does the consumer want done)?What do consumers need help with when they use the product?

How is your product repaired, service, disposed of?

DIFFERENTIATION

• The essence of differentiation is to make choices that are different from those of rivals.

• Successful differentiators create offerings that “delight” customers (“that was awesome”).

• Delight and awesome products come from doing something unexpected or surprising….perceptively better than competitive offerings. (NPS helps here)

IMPLICATIONS FROM NET PROMOTER SCORES

DIFFERENTIATION

• The essence of differentiation is to make choices that are different from those of rivals.

• Successful differentiators create offerings that “delight” customers (“that was awesome”).

• Delight and awesome products come from doing something unexpected or surprising….perceptively better than competitive offerings. (NPS helps here)

• Differences in positioning are necessary but not sufficient to create a competitive advantage

– Sustainable advantage depends on barriers to imitation

A B

C

D

Industry

A

B

C

Industry

Barriers to Entry Barriers to Imitationvs.

• Barriers to entry shared by all industry competitors; barriers to imitation are firm-specific.

• Barriers to imitation are created by firms through developing unique resources and capabilities.

• Barriers to imitation are primarily of two types: – Barriers to cost imitation (e.g., access to inputs, scale, experience)– Barriers to product/service imitation and accessing customers (e.g., features,

patents, brands, convenience, etc.)• Barriers to imitation also act as barriers to entry.

7% ROA

5% ROA

15% ROA