The Nature of Differentiation TOTAL CUSTOMER RESPONSIVENESS Differentiation not just about the product , it embraces the whole relationship between the supplier and the customer. INTANGIBLE DIFFERENTATION Unobservable and subjective characteristics that appeal to customer’s image, status, identity, and desire for exclusivity
Observable product characteristics:
size, color, materials, etc.
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!
— 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: 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)
Differentiation and the Product Life Cycle New packages of hardware and software introduced SYSTEM Augmentation: repackaging of hardware and software PRODUCTS & SERVICES Decommoditization COMMODITY PRODUCTS & SERVICES Commoditization Desystematization: some packages unbundled
Differentiation in Pain Relievers: Multidimensional Scaling of Competing Products in the U.S. High Low Low High EFFECTIVENESS GENTLENESS Tylenol Bufferin Excedrin Bayer Anacin Private label aspirin
VALUE CURVE for U.S. WINE INDUSTRY – YELLOW TAIL Price Use of technical wine terminology Above-the-line marketing Aging quality Vineyard prestige Wine complexity Wine range Easy drinkability Ease of selection Fun and adventure Low High Expensive wines Yellow tail Cheap wines
Identifying Differentiation Potential: The Demand Side 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
Especially problematic with “experience” and “credence” goods (as opposed to “search” goods)
Many forms of medical treatment
Home maintenance services, such as plumbing and electricity.
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?
Signaling and Reputation
The Impact of Quality on Profitability Low 25% 60% High Relative market share Relative product quality Low 33% 67% High Relative product quality Low 33% 67% High Relative product quality Low 33% 67% High Low 25% 60% High Relative market share Low 25% 60% High Relative market share ROI (%) Relative Price Relative Direct Cost Conclusion : Increases in quality typically add more to price than they do to 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
Using the Value Chain to Identify Differentiation Potential on the Supply Side FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT INBOUND OPERATIONS OUTBOUND MARKETING SERVICE LOGISTICS LOGISTICS & SALES MIS that supports fast response capabilities Training to support customer service excellence Unique product features. Fast new product development 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. 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. Supplies of steel & aluminum Service & technical support Sales Distribution Inventory holding Manufacturing Design Engineering Inventory holding Purchasing Distribution Marketing Canning Processing Inventory holding Purchasing CANNER CAN MAKER 1 2 4 5 3
emergence of a dominant design and common technical standards
Introduction Growth Maturity Decline Industry Sales Time
Product and Process Innovation Over Time Time Rate of innovation Product Innovation Process Innovation
Standardization of Product Features in Cars FEATURE INTRODUCTION GENERAL ADOPTION Speedometer 1901 by Oldsmobile Circa 1915 Automatic transmission 1st installed 1904 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 a dopte s 1912 S tandard 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 S tandard equipment by 1969 Antilock brakes Introduced 1972 Standard on GM cars in 1991 Air bags GM i ntroduce s 1974 By 1994 most new cars equipped with air bags
The Driving Forces of Industry Evolution Customers become more knowledgeable & experienced Diffusion of technology Demand growth slows as market saturation approaches Customers become more price conscious Products become more standardized Distribution channels consolidate Production shifts to low-wage countries Price competition intensifies Bargaining power of distributors increase s BASIC CONDITIONS INDUSTRY STRUCTURE COMPETITION Excess capacity increases Production becomes less R&D & skill-intensive Quest for new sources of differentiation
Note: The figure shows standardized means for each variable for businesses at each stage of the life cycle . Strategy and Performance across the Industry Life Cycle
ROI at Different Stages of the Industry Life Cycle
Changes in the Population of Firms over the Industry Life Cycle: US Auto Industry 1885-1961 Source: S. Klepper, Industrial & Corporate Change, August 2002, p. 654. “ Organizational Ecology”
The World’s Biggest Companies, 1912 and 2006 (by market capitalization) 190 Procter & Gamble 0.16 De Beers 190 HSBC 0.16 BAT 196 Gazprom 0.16 Navistar 197 Toyota Motor 0.17 American Brands 197 Wal-Mart Stores 0.17 Singer 211 Royal Dutch Shell 0.17 General Electric 212 Bank of America 0.18 Anaconda 233 BP 0.19 Royal Dutch Shell 239 Citigroup 0.20 Pullman 281 Microsoft 0.29 J&P Coates 363 General Electric 0.39 Exxon 372 Exxon Mobil 0.74 US Steel $ bn. 2006 $ bn. 1912
Fundamental change in product and distribution – work backwards
1880s 1920s 1960s 2000 Mail order, catalogue retailing e.g. Sears Roebuck Chain Stores e.g. A&P Discount Stores e.g. K-Mart Wal-Mart “ Category Killers” e.g. Toys-R-Us, Home Depot Internet Retailers e.g. Amazon; Expedia Warehouse Clubs e.g. Price Club Sam’s Club Innovation & R enewal over the I ndustry L ife C ycle : R etailing ?
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