Differentiation Advantage OUTLINE The nature of differentiation

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

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 TANGIBLE DIFFERENTATION Observable product characteristics • size, color, materials, etc. • performance • packaging • complementary services INTANGIBLE DIFFERENTATION Unobservable and subjective characteristics relating to image, status, exclusively, identity Security: P&G: raise your hands, choosy mothers, look who noticed, scratch your head. Ring arnd collar. Best man can get. You’re worth it. Clothing insignias. TOTAL CUSTOMER RESPONSIVENESS differentiation not just about the product, it embraces the whole relationship between the supplier and the customer.

Value Equivalence Line Get customer to perceive benefits, get the price. Price may be part of “benefits” (exclusivity) “Setting value, not price, ” RALF LESZINSKI AND MICHAEL V. MARN, The Mc. Kinsey Quarterly, 1997 Number 1

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: FOCUSED DIFFERENTIATION: Appealing to what is in common between different customers (Mc. Donalds hamburgers, Honda cars, Sears) 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 (%) Cisco Systems Oracle Solectron Dell Computer Best Buy Applied Materials Sun Microsystems Merrill Lynch Citi. Group Intel Goldman Sachs General Dynamics Texas Instruments United. Health Group 73. 4 65. 1 61. 7 56. 9 51. 3 49. 8 45. 2 41. 1 40. 8 38. 2 38. 1 36. 3 35. 7 Av. annual return (%) Microsoft Safeway Freddy Mac Washington Mutual J. P. Morgan Chase Pfizer Lowe’s Enron Walgreen Wells Fargo Cigna Cardinal Health Tech Data Houshold International QUESTION: Which is the primary basis for competitive advantage in the above companies: cost or differentiation? 35. 4 35. 2 34. 8 34. 4 33. 3 32. 1 31. 6 31. 3 30. 7 30. 1 30. 0 29. 6 29. 4

Differentiation and the Product Life Cycle New packages of hardware and software introduced Augmentation: repackaging of hardware and software SYSTEM PRODUCTS & SERVICES Decommoditization Desystematization : some packages unbundled COMMODITY Commoditization

Analyzing 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. High Tylenol Low High Bufferin EFFECTIVENESS Bayer Private label aspirin Anacin Excedrin Low GENTLENESS Size of market?

Identifying Differentiation Potential: The Demand Side THE PRODUCT THE CUSTOMER What needs does it satisfy? By what criteria do they choose? What are key attributes? Relate patterns of customer preferences to product attributes What price premiums do product attributes command? What motivates them? 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

Differentiation of Hardware and Software SUPPORT (SOFTWARE) Differentiated Undifferentiated Differentiated SYSTEM PRODUCT SERVICE COMMODITY MERCHANDISE (HARDWARE) Undifferentiated

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. . Body Shop

Problem of Quality in Experience Goods: A “Prisoner’s Dilemma” The problem of experience goods : quality can only be ascertained after purchase. Hence: Prisoner’s Dilemma: - Producer’s strategies High quality Consumer’s strategies High price Low quality 7 10 7 -5 -5 10 3 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 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.

28 7 16 23 Low 25% 60% High Relative market share 103 104 101 Low 25% 102 60% High Relative market share 67% High 20 108 Relative Direct Cost Low 33% 14 107 Relative product quality 38 67% High 28 Relative Price Low 33% 19 Relative product quality 67% High ROI (%) Low 33% Relative product quality The Impact of Quality on Profitability 104 103 101 104 102 100 Low 25% 60% High Relative market share Conclusion: Increases in quality add more to price then they do to cost.

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 Quality of components & materials Defect free products. Wide variety MARKETING LOGISTICS OUTBOUND & SALES Fast delivery. Efficient order processing Building brand reputation SERVICE 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 5 2 3 4 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. Distribution 1. Distinctive can design can assist canners’ marketing activities. Marketing Canning Processing Inventory holding Purchasing Service & technical support Sales Distribution Inventory holding Manufacturing Design Engineering Inventory holding Purchasing Supplies of steel & aluminum CAN MAKER CANNER