Differentiation Advantage

1
Differentiation Advantage
OUTLINE

• The nature of differentiation
• Differentiation and segmentation
• Analyzing the demand side
• Analyzing the supply side
• Bringing it all together value chain analysis

2
The Nature of Differentiation
DEFINITION Providing something unique that is
valuable to the buyer beyond simply offering a
low price. (M. Porter) THE KEY IS CREATING
VALUE FOR THE CUSTOMER
INTANGIBLE DIFFERENTATION Unobservable and
subjective characteristics relating to
image, status, exclusively, identity

• TANGIBLE DIFFERENTATION
• Observable product characteristics
• size, color, materials, etc.
• performance
• packaging
• complementary services

TOTAL CUSTOMER RESPONSIVENESS differentiation
not just about the product, it embraces the whole
relationship between the supplier and the
customer.
3
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)

4
Differentiation vs. Cost Leadership as a Basis
for Sustained Competitive Advantage
Highest returns to shareholders among the Fortune
200, 1987-97. Av. annual return
() Av. annual return
() United Healthcare 49.3 Berkshire
Hathaway 31.6 Microsoft 45.6 Tosco 31.6 Paci
fic Healthcare 42.6 Compaq Computer 31.4 Home
Depot 41.8 Lowes 29.6 BankAmerica 39.4 Wel
ls Fargo 27.2 Fannie Mae 39.2 Nationsbank 25.
8 Cardinal Health 40.2 Philip
Morris 25.3 Nike 33.6 Colgate-Palmolive 25.5 N
orwest Corp. 33.1 Eli Lilly 25.3 Travelers
Group 32.7 Sun Microsystems 25.3 Coca-Cola 32.
6 Campbell Soup 25.3 Gillette 32.4 Procter
Gamble 25.2 Pfizer 32.3 Warner-Lambert 25.2
QUESTION Which is the primary basis for
competitive advantage in the above companies
cost or differentiation?
5
Analyzing the Demand Side

• Techniques for analyzing product attributes and
• positioning
• Multidimensional Scaling
• Conjoint Analysis
• Hedonic Price Analysis

6
Differentiation in Pain Relievers
Multidimensional Scaling of Competing Products in
the U.S.
High
Tylenol
Low
High
EFFECTIVENESS
Bufferin
Bayer
Private label aspirin
Anacin
Excedrin
Low
GENTLENESS
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Identifying Differentiation Potential The Demand
Side
What needs does it satisfy?
THE PRODUCT
What are key attributes?

• 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

Relate patterns of customer preferences to
product attributes
By what criteria do they choose?
THE CUSTOMER
What price premiums do product attributes command?
What motivates them?
What are demographic, sociological, psychological
correlates of customer behavior?
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Differentiation of Hardware and Software
SOFTWARE Differentiated
Undifferentiated
SYSTEM PRODUCT SERVICE
COMMODITY
Differentiated HARDWARE Undifferentiated
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Differentiation and the Product Life Cycle
New packages of hardware and software introduced
Augmentation repackaging of hardware and software
SYSTEM
Desystematization some packages unbundled
PRODUCTS SERVICES
PRODUCTS SERVICES
Decommoditization
Commoditization
COMMODITY
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Consistency of Differentiation Strategy Product
Integrity

• Key to successful differentiation is consistency
  of all aspects of the firms relationship with
  its customers.
• Product Integrity the total balance of product
  features
• Internal integrity consistency between
  function and structure
• External integrityfit between the product
  and the customers
  objectives, values, lifestyle etc..

11
The Role of Quality Signaling

• The problem of experience goods quality can
  only be ascertained after purchase. Hence
  Prisoners Dilemma-
• Producers strategies
• High quality Low quality
  High
  7 10
• Consumers price 7
  -5
• strategies
• Low -5
  3
• price 10 3
• 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

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The Impact of Quality on Profitability
ROI () Relative Price
Relative Direct Cost
19 28 38
107 107 108 104
103 101
Relative product quality Low 33 67 High
Relative product quality Low 33 67 High
Relative product quality Low 33 67 High
14 20 28
103 104 104 104
102 100
7 16 23 101
101 102 104 102
100
Low 25 60 High Relative market share
Low 25 60 High Relative market share
Low 25 60 High Relative market share
Conclusion Increases in quality add more to
price then they do to cost.
13
Using the Value Chain to Identify Differentiation
Potential on the Supply Side
MIS that supports fast response capabilities
Training to support customer service excellence
Unique product features. Fast new product
development
FIRM INFRASTRUCTURE HUMAN RESOURCE
MANAGEMENT TECHNOLOGY DEVELOPMENT INBOUND
OPERATIONS OUTBOUND MARKETING SERVICE LOG
ISTICS LOGISTICS SALES
Customer technical support. Consumer credit.
Availability of spares
Quality of components materials
Defect free products. Wide variety
Fast delivery. Efficient order processing
Building brand reputation
14
Identifying Differentiation Opportunities through
Linking the Value Chains of the Firm and its
Customers Can Manufacture
1
Service technical support Sales Distribution Inv
entory holding Manufacturing Design
Engineering Inventory holding Purchasing
5
2
3
4
Distribution Marketing Canning Processing Inventor
y holding Purchasing
Supplies of steel aluminum
CANNER
CAN MAKER
1. Distinctive can design can assist canners
marketing activities. 2. High manufacturing
tolerances can avoid breakdowns in customers
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 canners efficiency of plant
utilization.