Differentiation Advantage
OUTLIN
E
• 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 TO CREATE VALUE FOR THE CUSTOMER
TANGIBLE DIFFERENTATION
Observable product characteristics:
• size, color, materials, etc.
• performance
• packaging
• complementary services
INTANGIBLE
DIFFERENTATION
Unobservable and subjective
characteristics that appeal to
customer’s image, status,
identity, and desire for exclusivity
TOTAL CUSTOMER RESPONSIVENESS
Differentiation not just about the product, it embraces the whole
relationship between the supplier and the customer.
Differentiation and Segmentation
DIFFERENTIATION: is concerned with how a firm distinguishes
its 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)
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 and the Product Life Cycle
New packages of hardware
and software introduced
Augmentation:
repackaging of
hardware and
software
SYSTEM
PRODUCTS
& SERVICES
PRODUCTS
& SERVICES
Decommoditization
Desystematization
: some packages
unbundled
COMMODIT
Y
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
Identifying Differentiation Potential:
The Demand Side
THE PRODUCT
What needs
does it satisfy?
What are key
attributes?
By what
criteria do
they choose?
Relate patterns of
customer
preferences to
product
attributes
THE
CUSTOMER
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.
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
Consumer’s
strategies
High
price
Low
price
High quality
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
104
101
Low 25%
101
102
60% High
Relative market share
67% High
20
108
Relative Direct Cost
Low 33%
14
107 107
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
104
102 100
Low 25%
60% High
Relative market share
Conclusion: Increases in quality typically add more to price than 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
LOGISTICS
Quality of
components &
materials
Defect free
products.
Wide variety
OUTBOUND
MARKETING
LOGISTICS
& 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