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
Potentially more durable than cost leadership!
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 (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.
High
Tylenol
Low
High
Bufferin
EFFECTIVENESS
Bayer
Private
label
aspirin
Anacin
Excedrin
Low
GENTLENESS
VALUE CURVE for U.S. WINE
INDUSTRY – YELLOW TAIL
High
Expensive
wines
Yellow tail
Cheap wines
Low
Price
Above-the-line
marketing
Use of technical
wine terminology
Vineyard
prestige
Aging
quality
Wine
range
Wine
complexity
Easy
drinkability
Ease of
selection
Fun and
adventure
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
Supply 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 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?
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
Industry Evolution
OUTLIN
E
• The industry life cycle
• Industry structure, competition, and
success factors over the life cycle.
• Anticipating and shaping the future.
Industry Sales
The Industry Life Cycle
Introduction
Growth
Maturity
Time
Drivers of industry evolution :
• demand growth
• creation and diffusion of knowledge
• emergence of a dominant design and common
technical standards
Decline
Product and Process Innovation Over Time
Rate of innovation
Product Innovation
Process Innovation
Time
Standardization of Product Features in Cars
FEATURE
INTRODUCTION
GENERAL ADOPTION
Speedometer
1901 by Oldsmobile
Automatic transmission 1st installed 1904
Circa 1915
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 equipped
with air bags
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
Color
B&W
1900 50 90 07
MOTORCYCLES
1930
50 70
TV’s
Portable
90
07
HDTV
?
• Life cycle model can help us to anticipate industry
evolution—but dangerous to assume any common, predetermined pattern of industry development
• Life cycles may be shortening
Evolution of Industry Structure over the Life Cycle
INTRODUCTION
Affluent buyers
GROWTH
Increasing
penetration
TECHNOLOGY
Rapid product
innovation
Product and
Incremental
process innovation innovation
PRODUCTS
Wide variety,
Standardization
rapid design change
Commoditization
Continued
commoditization
MANUFACTURING
Short-runs, skill
intensive
Deskilling
Overcapacity
DEMAND
TRADE
Capacity shortage,
mass-production
MATURITY
Mass market
replacement
demand
DECLINE
Knowledgeable,
customers, residual segments
Well-diffused
technology
-----Production shifts from advanced to developing countries-----
COMPETITION
Technology-
Entry & exit
KSFs
Product innovation
Process technology. Design.
Shakeout &
consolidation
Cost efficiency
Price wars,
exit
Overhead reduction, rationalization, low
cost sourcing
The Driving Forces of Industry Evolution
BASIC CONDITIONS
Customers become
more knowledgeable
& experienced
INDUSTRY STRUCTURE
Customers become
more price conscious
Products become
more standardized
Diffusion of
technology
COMPETITION
Production
becomes less R&D
& skill-intensive
Production shifts
to low-wage
countries
Quest for new
sources of
differentiation
Price competition
intensifies
Excess capacity
increases
Demand growth
slows as market
saturation approaches
Distribution channels
consolidate
Bargaining power
of distributors
increases
Strategy and Performance across the Industry Life Cycle
12
Growth
Maturity
Decline
10
8
6
4
Advertising/Sales
Investment/Sales
Age of Plant &
Equip.
Product
R&D/Sales
% Sales from
New Products
New Products
Technical
Change
Value
Added/Revenue
0
ROI
2
Note: The figure
shows
standardized means
for each variable for
businesses at each
stage of the life cycle.
ROI at Different Stages of the Industry Life Cycle
25
20
15
Real annual
growth rate <3%
10
Real annual
growth rate 3-6%
ROI (%)
Real annual
growth rate >6%
5
0
Growth Maturity Decline
Changes in the Population of Firms over the
Industry Life Cycle: US Auto Industry 1885-1961
“Organizational Ecology”
250
200
150
No. of firms
100
50
0
1895
1905
1915
1925
1935
1945
1955
Source: S. Klepper, Industrial & Corporate Change, August 2002, p. 654.
The World’s Biggest Companies, 1912 and 2006
(by market capitalization)
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
Adaptation and Change
• Sources of Inertia
– Routines: Core capabilities become core rigidities
– Social and political structures
– Conformity: institutional isomorphism and legitimacyseeking
– 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
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
Innovation & Renewal over the
Industry Life Cycle: Retailing
Mail order,
catalogue
retailing
e.g. Sears
Roebuck
1880s
Chain
Stores
e.g. A&P
1920s
Warehouse
Internet
Clubs
Retailers
e.g. Price Club
e.g. Amazon;
Sam’s Club
Expedia
Discount
“Category
Stores
Killers”
e.g. K-Mart
e.g. Toys-R-Us,
Wal-Mart
Home Depot
?
1960s
2000
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 faster
is the way to win
Rule-busting innovation
is the way to win
IT creates competitive advantage
Unconventional business concepts
create 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-haired
revolutionaries
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?