Service As A Differentiator In Commodity Type Markets

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  • Service As A Differentiator In Commodity Type Markets

    1. 1. HSLV January 2006 Service as a Differentiator in Commodity Type Markets
    2. 2. Themes for the Evening <ul><li>Introduction </li></ul><ul><li>Theoretical Underpinnings </li></ul><ul><ul><li>Augmented Product Concept </li></ul></ul><ul><ul><li>Lifecycle Theory </li></ul></ul><ul><ul><li>A look back at Generic Theories </li></ul></ul><ul><ul><ul><li>Porter </li></ul></ul></ul><ul><ul><ul><li>Mathur </li></ul></ul></ul><ul><ul><li>Servitisation </li></ul></ul><ul><ul><li>Relationship Marketing </li></ul></ul><ul><li>Research Paper and Discussion </li></ul>
    3. 3. Augmented Product Concept <ul><li>Levitt’s Augmented Product Concept </li></ul><ul><ul><li>Core Benefits </li></ul></ul><ul><ul><li>Other Aspects that help define the product and brand etc </li></ul></ul><ul><ul><li>More ‘intangible’ aspects help position the product in the market space </li></ul></ul><ul><li>Useful concept to hold - consumer and industrial products equally valid </li></ul>
    4. 4. Life cycle Theory <ul><li>Stage theory - useful to relate the stage theory with a strategic viewpoint - how does strategy change with lifecycle stages ? This is well documented in the literature </li></ul><ul><li>Useful though in industrial markets is the Transaction Lifecycle (TLC) concept. I use this in my paper. </li></ul>See next slide and Mathur’s LRP paper and his 1988 JGM paper
    5. 5. Chasm FIRST-OFFS NICHE ENTRY MASS ENTRY The Early The First Few The Mainstream Market Market Custom Packaged Standardisation Mass Customisation Solutions Solutions Technology Visionaries Pragmatists Conservatives Sceptics Enthusiast Crossing the Chasm Source: Geoffrey Moore
    6. 6. Transaction Lifecycle Model New packages of merchandise and support introduced SYSTEM COMMODITY DE-SYSTEMISATION SYSTEMISATION Some packages Repackaging of differentiated increasingly un-bundled merchandise and support PRODUCT & PRODUCT & SERVICE SERVICE Some Merchandise and Merchandise support substituted and support and added deleted COMMODITISATION DE-COMMODITISATION Differences quickly Differences copied Introduced Mathur (1988 )
    7. 7. The Marketing-Engineering Balance over the Stages of the Technology Life Cycle Engineering Efforts Marketing Efforts Stages of Technology Cutting State of the Advanced Mainstream Mature Decline Edge Art Low High Low High Source: Popper & Buskirk (1992) Current position of industry
    8. 8. Generic Theories <ul><li>Porter (1980) - we are familiar with </li></ul><ul><ul><li>Low Cost and differentiation </li></ul></ul><ul><ul><li>New interpretations suggest Porter’s exclusivity can be challenged. We can have a mixed strategy - low cost AND differentiation together </li></ul></ul><ul><li>Mathur (1988) has an alternative viewpoint and one that we can use to help our case in devising strategy in industrial product - markets. He proposes 4 polar strategies </li></ul><ul><ul><li>System Product </li></ul></ul><ul><ul><li>Service Commodity </li></ul></ul>
    9. 9. Mathur Cont.. <ul><li>4 Polar points </li></ul><ul><ul><li>System </li></ul></ul><ul><ul><li>Product </li></ul></ul><ul><ul><li>Service </li></ul></ul><ul><ul><li>Commodity </li></ul></ul><ul><li>Linked through </li></ul><ul><ul><li>Merchandise and Support </li></ul></ul><ul><ul><li>Expertise and Personalisation </li></ul></ul><ul><li>In each case we can have the factors differentiated or undifferentiated </li></ul>
    10. 10. The Four Polar Generic Strategies MERCHANDISE Differentiated MERCHANDISE Undifferentiated SUPPORT SUPPORT Differentiated Undifferentiated SYSTEM PRODUCT SERVICE COMMODITY
    11. 11. EXPERTISE Differentiated EXPERTISE Undifferentiated PERSONALISATION Differentiated Undifferentiated CONSULTANT SPECIALIST AGENT TRADER Dimensions of Support Differentiation
    12. 12. Dimensions of Merchandise Differentiation CONTENT Differentiated CONTENT Undifferentiated IMAGE IMAGE Differentiated Undifferentiated EXCLUSIVE SPECIAL AUGMENTED STANDARD
    13. 13. Potential Strategy Trajectories to Escape the ‘Commodity Trap’ MERCHANDISE Differentiated MERCHANDISE Undifferentiated SUPPORT SUPPORT Differentiated Undifferentiated SYSTEM PRODUCT SERVICE COMMODITY
    14. 14. Differentiation strategy <ul><li>Create value for buyer </li></ul><ul><li>Also communicate their uniqueness </li></ul><ul><li>Bear the cost of being unique but minimise the added costs </li></ul><ul><li>Trade off between cost and differentiation </li></ul><ul><li>Sustain the differentiation - constantly invest new sources of buyer value </li></ul><ul><li>Challenge is to be both low cost and differentiation (Dess & Miller 1993) </li></ul>
    15. 15. Servitisation <ul><li>The integration of product and service elements to create a ‘whole’ </li></ul><ul><li>It is the core product and the augmented product rolled into one </li></ul><ul><li>The firm competes with key service features to create competitive advantage </li></ul><ul><li>Usually this is integrated backwards to suppliers and forwards to customers </li></ul><ul><li>This approach is most useful when combined with relationship management </li></ul>
    16. 16. Product Service Product with Service as Product and Service an Add-on Package as an Integrated Package and Inseparable Product Service Integrated Non-Servitised Servitised See Roquette as an example
    17. 17. Research methodology <ul><li>Part of a wider study </li></ul><ul><li>Quantitative and qualitative </li></ul><ul><li>In depth interviews with three commodity chemical producers over two years with a wide variety of respondents </li></ul><ul><li>Postal survey, 62 valid responses from sample of 116 </li></ul>
    18. 18. Indicative findings <ul><li>Aim to identify business attributes that are perceived as important </li></ul><ul><li>Eight service attributes found </li></ul><ul><li>One service attribute found significant at the 5% level namely “regular contact with customers” </li></ul><ul><li>This attribute is at the very heart of marketing and especially relationship marketing </li></ul>
    19. 19. Some quotations <ul><li>“..seeks standards of quality and service which our customers regard as being consistently better than those of competitors” (Alpha 1996) </li></ul><ul><li>“..focus is on efficiency and customer service ...” (Beta 1997) </li></ul><ul><li>All staff will or towards satisfying our customers ....” (Gamma 1996) </li></ul>
    20. 20. Key Suppliers Key Customer Service Functions Tangible Products Tangible Products A Typical Marketing System Showing Product and Service Functions Commodity Chemicals Producer
    21. 21. Commodity Chemicals Producer Key Suppliers Key Customer Service Functions Relationship Management Tangible Products Tangible Products Telemetry Systems A Typical Marketing System Showing Product and Service Elements
    22. 22. Conclusions <ul><li>Commodities can be classified in the context of commodity chemicals </li></ul><ul><li>Historical cost leadership strategies put little emphasis on service </li></ul><ul><li>Strong link between provision of services and development of relationship marketing </li></ul>
    23. 23. cont. <ul><li>Key service attributes: </li></ul><ul><li>* regular contact with customers </li></ul><ul><li>* order handling procedures </li></ul><ul><li>* emergency response to accident and prevention </li></ul><ul><li>* technical information </li></ul><ul><li>* delivery on time </li></ul>
    24. 24. cont. <ul><li>* credit terms </li></ul><ul><li>* technical service and assistance </li></ul><ul><li>* JIT delivery procedures </li></ul><ul><li>service is arguably the one and only differentiator in the commodity chemicals sector </li></ul>
    25. 25. Commodity Chemicals Producer Key Suppliers Key Customer Relationship Management Tangible Products Tangible Products Telemetry Integrated Product/ Service (Servitisation) An Integrated or Servitised System of Value and Relationships
    26. 26. Implications <ul><li>Firms seem to have recognised the important of service in their augmented product offering </li></ul><ul><li>Responded in a variety of ways most notably through relationship building reducing distance between the parties </li></ul><ul><li>Service and relationship building used to reduce transaction costs </li></ul>
    27. 27. cont. <ul><li>Could be argued to be pursuing cost leadership strategy through a service differentiation route </li></ul><ul><li>Perhaps cost leadership and differentiation are not mutually exclusive </li></ul><ul><li>Service being used to escape from the “commodity trap” by adding value to the core product over which they have little control </li></ul>
    28. 28. cont. <ul><li>To break out from the “commodity trap” of blind allegiance to cost leadership firms must seek methods of differentiation </li></ul><ul><li>The nature of the product suggest that this is not possible by manipulating the core product attributes </li></ul><ul><li>Differentiation must be through the augmented product with service in the forefront </li></ul>
    29. 29. Relationship Marketing <ul><li>Emerging from the Services literature and from the IMP Group </li></ul><ul><li>A ‘partnership’ between buyers and suppliers </li></ul><ul><li>Creating networks and alliances to counter the vagaries of markets </li></ul><ul><li>Trust, Commitment and Promise essential qualities </li></ul><ul><li>Aim is to reduce transaction costs and improve transactional values </li></ul><ul><li>Could be a way of breaking out of the commodity trap - competing on ‘non-price‘ elements - capabilities </li></ul>
    30. 30. Basis for Supplier Selection Product/Commodity Based Capability Based Adversarial Buying Power Relationships Co-operative Partnership Type Relationships Role Type <ul><li>Short Term Operational </li></ul><ul><li>Emphasis </li></ul><ul><li>Price Quality Based </li></ul><ul><li>Multiple Sourcing </li></ul><ul><li>Long Term Strategic </li></ul><ul><li>Capability Based </li></ul><ul><li>Competitive </li></ul><ul><li>Multiple Sourcing </li></ul><ul><li>Non Price Based </li></ul><ul><li>Operational Emphasis </li></ul><ul><li>Management Assistance </li></ul><ul><li>Technical Assistance </li></ul><ul><li>Strategic Emphasis </li></ul><ul><li>Single Sourcing </li></ul><ul><li>Continuous Improvement </li></ul>Buyer-Supplier Role Type in Purchasing Watts et al 1992
    31. 31. Paradigm Shift ? <ul><li>A move to compete on capabilities </li></ul><ul><li>A move away from ‘transaction marketing’ and towards ‘ relationship marketing’ </li></ul><ul><li>Emphasis on the long term - from both parties .... lots of advantages </li></ul><ul><li>To compete you have to embrace the new paradigm - fewer suppliers and an emphasis on ‘key customers’ - remember the Pareto rule ! </li></ul>
    32. 32. Increasing Value - 1 <ul><li>Increasing value to customers increases loyalty </li></ul><ul><li>Find the value gap and fill it </li></ul><ul><li>Manage the customer activity cycle – Pre/During and Post activity </li></ul><ul><li>Lock-in rather than lock-on. Lock-on customers are not captive. </li></ul>
    33. 33. Increasing Value -2 <ul><li>Traditional strategy built around market share leads to diminishing returns </li></ul><ul><li>Smart companies are increasing returns by defining ‘market space's and not sales of discrete items. </li></ul><ul><li>Co-operation leads to increasing value to both parties with lower transactional costs </li></ul>
    34. 34. Some references <ul><li>S Vandermerwe (2000) How increasing value to customers improves business results; Sloan Management Review, Fall, pp. 27-37. </li></ul><ul><li>D H McQuiston (2004) Successful branding of a commodity product: The case of RAEX Laser steel; Industrial Marketing Management , Vol. 33, pp. 345-354. </li></ul><ul><li>B Van Loo, R Diderdonck and P Gemmel (1998) Service Management: An Integrated Approach; Prentice Hall, see Chapter 3 on Servitization. </li></ul><ul><li>T Davenport (2005) The coming of Commoditization of Processes; Harvard Business Review , June. </li></ul><ul><li>J A S De Vasconcellos (1991) Key Success Factors in Marketing Mature Products; Industrial Marketing Management , Vol. 20, pp 263-278. </li></ul>

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