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 that appeal to customer’s image, status, identity, and desire for exclusivity

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 TO CREATE VALUE FOR THE CUSTOMER

Potentially more durable than cost leadership!

Differentiation and SegmentationDifferentiation and Segmentation

DOES DIFFERENTIATION IMPLY SEGMENTATION?

—Not necessarily, depends upon the differentiation strategy:

BROAD SCOPE DIFFERENTIATION Appealing to what is 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 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 andpositioning:• Multidimensional Scaling (implied preferences)• Conjoint Analysis (stated preferences)• Hedonic Price Analysis (revealed preferences)• Value Curve Analysis (Chan & Mauborgne)

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

VALUE CURVE for U.S. WINE INDUSTRY – YELLOW TAIL

Expensive winesYellow tailCheap wines

Price

Use of technicalwine terminology

Above-the-linemarketing

Agingquality

Vineyardprestige

Winecomplexity

Winerange

Easydrinkability

Ease ofselection

Fun andadventure

Low

High

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

Supply Side: Product IntegritySupply Side: 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.

• Examples?

Signaling and ReputationSignaling and Reputation

• Akerlof: The market for lemons – A form of prisoner’s dilemma– Especially problematic with “experience” and “credence” goods

(as opposed to “search” goods)• Vitamin supplements • Education • Car repairs • Many forms of medical treatment • Home maintenance services, such as plumbing and electricity. • Estate agents

• Solutions– Warranties, money back guarantees, brand advertising,

sponsorship, retail environment– Premium pricing and advertising are complementary– Are brands more a signal of reliability or identity/lifestyle?

The Impact of Quality on ProfitabilityThe Impact of Quality on Profitability

Low 25% 60% High

Relative market share

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Low 25% 60% High

Relative market share

Low 25% 60% High

Relative market share

ROI (%) Relative Price Relative Direct Cost

Conclusion: Increases in quality typically add more to price than 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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CANNER CAN MAKER

1

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53

Industry EvolutionIndustry Evolution

• The industry life cycle

• Industry structure, competition, and success factors over the life cycle.

• Anticipating and shaping the future.

OUTLINE

The Industry Life Cycle The Industry Life Cycle

Drivers of industry evolution :• demand growth• creation and diffusion of knowledge• emergence of a dominant design and common

technical standards

Introduction Growth Maturity Decline

Ind

us

try

Sa

les

Time

Product and Process Innovation Over TimeProduct and Process Innovation Over Time

Time

Ra

te o

f in

no

va

tio

n

Product Innovation

Process Innovation

Standardization of Product Features in CarsStandardization of Product Features in Cars

FEATURE INTRODUCTION GENERAL ADOPTION

Speedometer 1901 by Oldsmobile Circa 1915

Automatic transmission 1st installed 1904 Introduced by Packard as an option, 1938. Standard on Cadillacs early 1950

Electric headlamps GM introduces 1908 Standard equipment by 1916

All-steel body GM adoptes 1912 Standard by early 1920s

All-steel enclosed body Dodge 1923 Becomes standard late 1920s

Radio Optional extra 1923 Standard equipment, 1946

Four-wheel drive Appeared 1924 Only limited availability by 1994

Hydraulic brakes Introduced 1924 Became standard 1939

Shatterproof glass 1st used 1927 Standard features in Fords 1938

Power steering Introduced 1952 Standard equipment by 1969

Antilock brakes Introduced 1972 Standard on GM cars in 1991

Air bags GM introduces 1974 By 1994 most new cars equippedwith air bags

How Typical is the Life Cycle Pattern?How Typical is the Life Cycle Pattern?

• Technology-intensive industries (e.g. pharmaceuticals, semiconductors, computers) may retain features of emerging industries.

• Other industries (especially those providing basic necessities, e.g. food processing, construction, apparel) reach maturity, but not decline.

• Industries may experience life cycle regeneration.

Sales Sales

1900 50 90 07 1930 50 70 90 07 MOTORCYCLES TV’s

• Life cycle model can help us to anticipate industry evolution—but dangerous to assume any common, pre-determined pattern of industry development

• Life cycles may be shortening

ColorB&W Portable

HDTV ?

Evolution of Industry Structure over the Life CycleEvolution of Industry Structure over the Life Cycle

INTRODUCTION GROWTH MATURITY DECLINE DEMAND Affluent buyers Increasing Mass market Knowledgeable,

penetration replacement customers, resi- demand dual segments

TECHNOLOGY Rapid product Product and Incremental Well-diffused innovation process innovation innovation technology

PRODUCTS Wide variety, Standardization Commoditiz- Continued rapid design change ation commoditization

MANUFACT- Short-runs, skill Capacity shortage, Deskilling Overcapacity URING intensive mass-production

TRADE -----Production shifts from advanced to developing countries-----

COMPETITION Technology- Entry & exit Shakeout & Price wars, consolidation exit

KSFs Product innovation Process techno- Cost efficiency Overhead red- logy. Design. uction, ration- alization, low

cost sourcing

The Driving Forces of Industry EvolutionThe Driving Forces of Industry Evolution

Customers become more knowledgeable

& experienced

Diffusion of

technology

Demand growthslows as market

saturation approaches

Customers become more price conscious

Products become more standardized

Distribution channels consolidate

Production shifts to low-wage countries

Price competition intensifies

Bargaining power of distributors

increases

BASIC CONDITIONS INDUSTRY STRUCTURE COMPETITION

Excess capacity increases

Production becomes less R&D & skill-intensive

Quest for new sources of differentiation

0

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8

10

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GrowthMaturityDecline

Note: The figure shows standardized means for each variable for businesses at each stage of the life cycle.

Strategy and Performance across the Industry Life CycleStrategy and Performance across the Industry Life Cycle

0

5

10

15

20

25

ROI (%)

Growth Maturity Decline

Real annualgrowth rate <3%

Real annualgrowth rate 3-6%

Real annualgrowth rate >6%

ROI at Different Stages of the Industry Life CycleROI at Different Stages of the Industry Life Cycle

0

50

100

150

200

250

1895 1905 1915 1925 1935 1945 1955

No. of firms

Changes in the Population of Firms over the Industry Life Cycle: US Auto Industry 1885-1961

Changes in the Population of Firms over the Industry Life Cycle: US Auto Industry 1885-1961

Source: S. Klepper, Industrial & Corporate Change, August 2002, p. 654.

“Organizational Ecology”

1912 $ bn. 2006 $ bn.

US Steel 0.74 Exxon Mobil 372

Exxon 0.39 General Electric 363

J&P Coates 0.29 Microsoft 281

Pullman 0.20 Citigroup 239

Royal Dutch Shell 0.19 BP 233

Anaconda 0.18 Bank of America 212

General Electric 0.17 Royal Dutch Shell 211

Singer 0.17 Wal-Mart Stores 197

American Brands 0.17 Toyota Motor 197

Navistar 0.16 Gazprom 196

BAT 0.16 HSBC 190

De Beers 0.16 Procter & Gamble 190

The World’s Biggest Companies, 1912 and 2006 (by market capitalization)

The World’s Biggest Companies, 1912 and 2006 (by market capitalization)

Adaptation and Change

• Sources of Inertia– Routines: Core capabilities become core rigidities

– Social and political structures

– Conformity: institutional isomorphism and legitimacy-seeking

– Complementarities between strategy, structure, and systems

• Tendency for punctuated equilibrium

– Limited search and blinkered perceptions

Preparing for the Future : The Role of Scenario Analysis in Adapting to Industry Change

Preparing for the Future : The Role of Scenario Analysis in Adapting to Industry Change

Stages in undertaking multiple Scenario Analysis:• Identify major forces driving industry change• Predict possible impacts of each force on the industry

environment• Identify interactions between different external forces• Among range of outcomes, identify 2-4 most likely/ most

interesting scenarios: configurations of changes and outcomes

• Consider implications of each scenario for the company• Identify key signposts pointing toward the emergence of

each scenario• Prepare contingency plan

Change strategies

• Problem of disruptive technologies (Christensen)– Create separate units

• ambidextrous organizations

• Plan to cross the chasm (Moore)– Fundamental change in product and

distribution – work backwards

1880s 1920s 1960s 2000

Mail order, catalogueretailinge.g. Sears Roebuck

ChainStores

e.g. A&P

DiscountStores

e.g. K-MartWal-Mart

“CategoryKillers”

e.g. Toys-R-Us,Home Depot

InternetRetailers

e.g. Amazon;Expedia

WarehouseClubs

e.g. Price ClubSam’s Club

Innovation & Renewal over the Industry Life Cycle: Retailing

Innovation & Renewal over the Industry Life Cycle: Retailing

?

Gary Hamel: Shaking the Foundations

OLD BRICK NEW BRICK

Top management is responsible for setting strategy

Everyone is responsible for setting strategy

Getting better, getting fasteris the way to win

Rule-busting innovationis the way to win

IT creates competitive advantage Unconventional business conceptscreate competitive advantage

Being revolutionary is high risk More of the same is high risk

We can merge our way to competitiveness

There’s no correlation between size and competitiveness

Innovation equals new products and new technology

Innovation equals entirely new business concepts

Strategy is the easy part, Implementation the hard part

Strategy is the easy only if you’re content to be an imitator

Change starts at the top Change starts with activists

Our real problem is execution Our real problem is execution

Big companies can’t innovate Big companies can become gray-hairedrevolutionaries

Case: Video Games

• Which companies have been most successful in each generation? What were the key success factors?

• Are the key success factors changing for the next generation?

• What strategy should your company (Microsoft, Sony, Nintendo) pursue for the next generation?