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 relating to image, status, exclusively, identity
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 CREATING VALUE FOR THE CUSTOMER
Differentiation and Segmentation
DIFFERENTIATION: is concerned with how a firm competes within
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: Appealing to what is in common between different customers (McDonalds hamburgers, Honda cars, Sears)
FOCUSED DIFFERENTIATION: 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 , 1987-97. Av. annual return (%) Av. annual return (% ) United Healthcare 49.3 Berkshire Hathaway 31.6 Microsoft 45.6 Tosco 31.6 Pacific Healthcare 42.6 Compaq Computer 31.4 Home Depot 41.8 Lowe’s 29.6 BankAmerica 39.4 Wells Fargo 27.2 Fannie Mae 39.2 Nationsbank 25.8 Cardinal Health 40.2 Philip Morris 25.3 Nike 33.6 Colgate-Palmolive 25.5 Norwest Corp. 33.1 Eli Lilly 25.3 Travelers Group 32.7 Sun Microsystems 25.3 Coca-Cola 32.6 Campbell Soup 25.3 Gillette 32.4 Procter & Gamble 25.2 Pfizer 32.3 Warner-Lambert 25.2 QUESTION: Which is the primary basis for competitive advantage in the above companies: cost or differentiation ?
Analyzing the Demand Side
Techniques for analyzing product attributes and
Hedonic Price Analysis
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
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
Select target customer group
Ensure customer / product compatibility
Evaluate costs and benefits of differentiation
Differentiation of Hardware and Software SYSTEM PRODUCT SERVICE COMMODITY SOFTWARE Differentiated Undifferentiated Differentiated HARDWARE Undifferentiated
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
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..
The Role of Quality Signaling
The problem of experience goods : quality can only be ascertained after purchase. Hence: Prisoner’s Dilemma :-
High quality Low quality High 7 10
Consumer’s price 7 -5
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
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 add more to price then 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