Differentiation AdvantageDifferentiation 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 DifferentiationThe Nature of Differentiation

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

INTANGIBLE DIFFERENTATION

Unobservable and subjectivecharacteristics relating to image, status, exclusivity, 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 SegmentationDifferentiation and Segmentation

DOES DIFFERENTIATION IMPLY SEGMENTATION?

--Not necessarily, depends upon the differentiation strategy:

BROAD SCOPE DIFFERENTIATION: Appealing to what is in common between different customers (McDonalds, Honda, Gillette)

FOCUSED DIFFERENTIATION: Appealing to what distinguishes different customer groups (MTV Harley-Davidson, Ralph Lauren)

DIFFERENTIATION: is concerned with how a firm distinguishesits offerings from those of its competitors (i.e. How the firm competes)

SEGMENTATION: is concerned with which customers, needs,

localities a firm targets (i.e. Where the firm competes)

Differentiation vs. Cost Leadership as a Basis for Competitive Advantage

Differentiation vs. Cost Leadership as a Basis for Competitive Advantage

Highest return on equity among top 200 US companies, 2002

(%) (%)

Colgate Palmolive 367.8 Gillette 53.8Caremark Rx 303.2 H.J. Heinz 48.5American Standard 161.4 Pfizer 45.7Yum Brands 98.1 Dell Computer 43.0Kellogg 80.5 TJX 41.3Anheuser-Busch 63.4 Oracle 36.4Nextel Communications 58.3 PepsiCo 35.6Sara Lee 58.0 3M 32.9Altria Group 57.0 Eli Lilly 32.7Wyeth 54.5 Sysco 31.9

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

Differentiation and the Product Life CycleDifferentiation 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 SideAnalyzing the Demand Side

Techniques for analyzing product attributes and

positioning:

• Multidimensional Scaling• Conjoint Analysis• Hedonic Price Analysis

Differentiation in Pain Relievers: Multidimensional Scaling of Competing

Products in the U.S.

Differentiation in Pain Relievers: Multidimensional Scaling of Competing

Products in the U.S.

High

Low

Low High

EFFECTIVENESS

GENTLENESS

Tylenol

Bufferin

Excedrin

Bayer

Anacin

Private label aspirin

Identifying Differentiation Potential: The Demand Side

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

Differentiated

MERCHANDISE(HARDWARE)

Undifferentiated

Differentiation of Hardware and SoftwareDifferentiation of Hardware and Software

Consistency of Differentiation Strategy: Product Integrity

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”

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

The Impact of Quality on ProfitabilityThe Impact of Quality on Profitability

Low 25% 60% High

Relative market share

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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

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

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.

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