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

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.

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 McKinsey Quarterly, 1997 Number 1

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
(McDonalds 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
Cisco Systems
Oracle
Solectron
Dell Computer
Best Buy
Applied Materials
Sun Microsystems
Merrill Lynch
CitiGroup
Intel
Goldman Sachs
General Dynamics
Texas Instruments
UnitedHealth Group
Av. annual return (%)
73.4
65.1
61.7
56.9
51.3
49.8
45.2
41.1
40.8
38.2
38.2
38.1
36.3
35.7
Av. annual return (% )
Microsoft
Safeway
Freddy Mac
Washington Mutual
35.4
35.2
34.8
34.4
33.3
J.P. Morgan Chase
Pfizer
Lowe’s
Enron
32.1
31.6
31.3
Walgreen
Wells Fargo
Cigna
Cardinal Health
30.7
30.1
30.0
29.6
Tech Data 29.4
Houshold International 29.4
QUESTION: Which is the primary basis for competitive advantage in the above companies: cost or differentiation?

New packages of hardware and software introduced
Augmentation: repackaging of hardware and software
PRODUCTS
& SERVICES
Decommoditization
SYSTEM
COMMODIT
Y
Desystematization
: some packages unbundled
PRODUCTS
& SERVICES
Commoditization

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

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

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

Differentiated
MERCHANDISE
(HARDWARE)
Undifferentiated
SUPPORT
(SOFTWARE)
Differentiated Undifferentiated
SYSTEM PRODUCT
SERVICE COMMODITY

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 Low quality
High 7 10 price 7 -5
Consumer’s 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
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.

ROI (%) Relative Price Relative Direct 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
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.

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
LOGISTICS LOGISTICS & SALES
SERVICE
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
1
2 3
4
5
CAN MAKER
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.
CANNER