Differentiation

Differentiation Advantage
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
The Nature
Nature of
of Differentiation
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 INTANGIBLE

Observable product characteristics:
size, color, materials, etc.
performance
packaging
complementary services
DIFFERENTATION
Unobservable and subjective
characteristics relating to
image, status, exclusivity,
identity

TOTAL CUSTOMER RESPONSIVENESS

Differentiation not just about the product, it embraces the whole
relationship between the supplier and the customer.
 Differentiation
Differentiation and
and Segmentation
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 in common
between different customers
(McDonalds, Honda, Gillette)
FOCUSED DIFFERENTIATION: Appealing to what distinguishes
different customer groups (MTV
Harley-Davidson, Ralph Lauren)
 Differentiation
Differentiation vs.
vs. Cost
Cost Leadership
Leadershipas
asaa
Basis
Basisfor
for Competitive
CompetitiveAdvantage
Advantage

Highest return on equity among top 200 US companies, 2002

(%) (%)
Colgate Palmolive 367.8 Gillette 53.8
Caremark Rx 303.2 H.J. Heinz 48.5
American Standard 161.4 Pfizer 45.7
Yum Brands 98.1 Dell Computer 43.0
Kellogg 80.5 TJX 41.3
Anheuser-Busch 63.4 Oracle 36.4
Nextel Communications 58.3 PepsiCo 35.6
Sara Lee 58.0 3M 32.9
Altria Group 57.0 Eli Lilly 32.7
Wyeth 54.5 Sysco 31.9

QUESTION: Which is the primary basis for competitive advantage

in the above companies: cost or differentiation?
Differentiation
Differentiation and
and the
the Product
Product Life
Life Cycle
Cycle

New packages of hardware

and software introduced

Augmentation: SYSTEM Desystematization

repackaging of : some packages
hardware and unbundled
software

PRODUCTS & PRODUCTS &

SERVICES SERVICES

Decommoditization Commoditization
COMMODITY
 Analyzing
Analyzing the
the Demand
Demand Side
Side

Techniques for analyzing product attributes and

positioning:

Multidimensional Scaling
Conjoint Analysis
Hedonic Price Analysis
 Differentiation
Differentiation in
in Pain
Pain Relievers:
Relievers:
Multidimensional
Multidimensional Scaling
Scaling ofof Competing
Competing
Products
Products inin the
the U.S.
U.S.
High

Tylenol

Low High

Bufferin EFFECTIVENESS

Bayer
Private
label Anacin
aspirin Excedrin

Low

GENTLENESS
 Identifying
Identifying Differentiation
Differentiation Potential:
Potential:
The
The Demand
Demand Side
Side
THE PRODUCT What needs What are key
does it satisfy? attributes? FORMULATE
DIFFERENTIATION
Relate patterns of STRATEGY
customer
preferences to Select product
By what
product attributes positioning in
criteria do
relation to product
they choose?
THE attributes
CUSTOMER What price
Select target
premiums do
customer group
product attributes
command? Ensure customer /
What product
What are compatibility
motivates demographic,
them? sociological, Evaluate costs and
psychological benefits of
correlates of differentiation
customer behavior?
Differentiation
Differentiation of
of Hardware
Hardware and
and Software
Software

SUPPORT
(SOFTWARE)
Differentiated Undifferentiated

Differentiated SYSTEM PRODUCT

MERCHANDISE
(HARDWARE)
Undifferentiated SERVICE COMMODITY
 Consistency
Consistency of
of Differentiation
Differentiation
Strategy:
Strategy: Product
Product Integrity
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 integrity: fit between the product
and the customers
objectives, values, lifestyle
etc.
 Problem
ProblemofofQuality
Qualityin
in Experience
ExperienceGoods:
Goods:
AAPrisoners
PrisonersDilemma
Dilemma

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

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.
 The
The Impact
Impact of
of Quality
Quality on
on Profitability
Profitability

ROI (%) Relative Price Relative Direct Cost

Relative product quality

Relative product quality

Relative product quality

67% High

67% High
67% High

19 28 38 107 107 108 104 103 101

14 20 28 103 104 104 104 102 100

Low 33%

Low 33%
Low 33%

7 16 23 101 101 102 104 102 100

Low 25% 60% High Low 25% 60% High Low 25% 60% High

Relative market share Relative market share Relative market share

Conclusion: Increases in quality add more to price then they do to cost.

 Using
Using the
the Value
Value Chain
Chain toto Identify
Identify
Differentiation
Differentiation Potential
Potential on
on the
the Supply
Supply Side
Side
MIS that supports Training to support Unique product features.
fast response customer service Fast new product
capabilities excellence development

FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS & SALES
Customer technical
support. Consumer
credit. Availability of
Quality of Defect free Fast delivery. Building brand spares
components & products. Efficient order reputation
materials Wide variety processing
 Identifying
IdentifyingDifferentiation
DifferentiationOpportunities
Opportunitiesthrough
through
Linking
Linkingthe
the Value
ValueChains
Chainsof
ofthe
the Firm
Firm and
and its
its
Customers:
Customers: Can
Can Manufacture
Manufacture

1
5
2 3 4

Inventory holding
Supplies of steel

Inventory holding

Inventory holding

technical support
Manufacturing

Distribution
& aluminum

Purchasing

Processing
Engineering

Distribution

Marketing
Purchasing

Canning
Service &
Design

Sales

CAN MAKER CANNER

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.