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Lecture 8


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Lecture 8

  1. 1. Differentiation Advantage <ul><li>The nature of differentiation </li></ul><ul><li>Differentiation and segmentation </li></ul><ul><li>Analyzing differentiation: the demand side </li></ul><ul><li>Analyzing differentiation: the supply side </li></ul><ul><li>Bringing it all together: value chain analysis </li></ul>OUTLINE
  2. 2. 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 <ul><li>TANGIBLE DIFFERENTATION </li></ul><ul><li>Observable product characteristics: </li></ul><ul><li>size, color, materials, etc. </li></ul><ul><li>performance </li></ul><ul><li>packaging </li></ul><ul><li>complementary services </li></ul>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!
  3. 3. Differentiation and Segmentation <ul><li>DOES DIFFERENTIATION IMPLY SEGMENTATION? </li></ul><ul><li>— Not necessarily, depends upon the differentiation strategy: </li></ul><ul><li>BROAD SCOPE DIFFERENTIATION Appealing to what is common between different customers (McDonalds, Honda, Gillette) </li></ul><ul><li>FOCUSED DIFFERENTIATION Appealing to what distinguishes different customer groups (MTV Harley-Davidson, Ralph Lauren) </li></ul>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)
  4. 4. 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
  5. 5. Analyzing the Demand Side <ul><li>Techniques for analyzing product attributes and </li></ul><ul><li>positioning: </li></ul><ul><li>Multidimensional Scaling (implied preferences) </li></ul><ul><li>Conjoint Analysis (stated preferences) </li></ul><ul><li>Hedonic Price Analysis (revealed preferences) </li></ul><ul><li>Value Curve Analysis (Chan & Mauborgne) </li></ul>
  6. 6. 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
  7. 7. 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
  8. 8. 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? <ul><li>FORMULATE DIFFERENTIATION STRATEGY </li></ul><ul><li>Select product positioning in relation to product attributes </li></ul><ul><li>Select target customer group </li></ul><ul><li>Ensure customer / product compatibility </li></ul><ul><li>Evaluate costs and benefits of differentiation </li></ul>
  9. 9. Supply Side: Product Integrity <ul><li>Key to successful differentiation is consistency of all aspects of the firm’s relationship with its customers. </li></ul><ul><li>Product Integrity : the total balance of product features </li></ul><ul><ul><ul><li>Internal integrity: consistency between function and structure </li></ul></ul></ul><ul><ul><ul><li>External integrity: fit between the product and the customers’ objectives, values, lifestyle etc. </li></ul></ul></ul><ul><ul><ul><li>Examples? </li></ul></ul></ul>
  10. 10. <ul><li>Akerlof: The market for lemons </li></ul><ul><ul><li>A form of prisoner’s dilemma </li></ul></ul><ul><ul><li>Especially problematic with “experience” and “credence” goods (as opposed to “search” goods) </li></ul></ul><ul><ul><ul><li>Vitamin supplements </li></ul></ul></ul><ul><ul><ul><li>Education </li></ul></ul></ul><ul><ul><ul><li>Car repairs </li></ul></ul></ul><ul><ul><ul><li>Many forms of medical treatment </li></ul></ul></ul><ul><ul><ul><li>Home maintenance services, such as plumbing and electricity. </li></ul></ul></ul><ul><ul><ul><li>Estate agents </li></ul></ul></ul><ul><li>Solutions </li></ul><ul><ul><li>Warranties, money back guarantees, brand advertising, sponsorship, retail environment </li></ul></ul><ul><ul><li>Premium pricing and advertising are complementary </li></ul></ul><ul><ul><li>Are brands more a signal of reliability or identity/lifestyle? </li></ul></ul>Signaling and Reputation
  11. 11. 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
  12. 12. 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
  13. 13. 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
  14. 14. Industry Evolution <ul><ul><ul><li>The industry life cycle </li></ul></ul></ul><ul><ul><ul><li>Industry structure, competition, and success factors over the life cycle. </li></ul></ul></ul><ul><ul><ul><li>Anticipating and shaping the future. </li></ul></ul></ul>OUTLINE
  15. 15. The Industry Life Cycle <ul><li>Drivers of industry evolution : </li></ul><ul><ul><ul><li>demand growth </li></ul></ul></ul><ul><ul><ul><li>creation and diffusion of knowledge </li></ul></ul></ul><ul><ul><ul><li>emergence of a dominant design and common technical standards </li></ul></ul></ul>Introduction Growth Maturity Decline Industry Sales Time
  16. 16. Product and Process Innovation Over Time Time Rate of innovation Product Innovation Process Innovation
  17. 17. 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
  18. 18. How Typical is the Life Cycle Pattern? <ul><li>Technology-intensive industries (e.g. pharmaceuticals, semiconductors, computers) may retain features of emerging industries. </li></ul><ul><li>Other industries (especially those providing basic necessities, e.g. food processing, construction, apparel) reach maturity, but not decline. </li></ul><ul><li>Industries may experience life cycle regeneration. </li></ul><ul><li>Sales Sales </li></ul><ul><li>1900 50 90 07 1930 50 70 90 07 </li></ul><ul><li>MOTORCYCLES TV’s </li></ul><ul><li>Life cycle model can help us to anticipate industry evolution — but dangerous to assume any common, pre-determined pattern of industry development </li></ul><ul><li>Life cycles may be shortening </li></ul>Color B&W Portable HDTV ?
  19. 19. Evolution of Industry Structure over the Life Cycle <ul><li>INTRODUCTION GROWTH MATURITY DECLINE </li></ul><ul><li>DEMAND Affluent buyers Increasing Mass market Knowledgeable, </li></ul><ul><li>penetration replacement customers, resi- </li></ul><ul><li>demand dual segments </li></ul><ul><li>TECHNOLOGY Rapid product Product and Incremental Well-diffused </li></ul><ul><li>innovation process innovation innovation technology </li></ul><ul><li>PRODUCTS Wide variety, Standardization Commoditiz- Continued rapid design change ation commoditization </li></ul><ul><li>MANUFACT- Short-runs, skill Capacity shortage, Deskilling Overcapacity </li></ul><ul><li>URING intensive mass-production </li></ul><ul><li>TRADE -----Production shifts from advanced to developing countries----- </li></ul><ul><li>COMPETITION Technology- Entry & exit Shakeout & Price wars, </li></ul><ul><li> consolidation exit </li></ul><ul><li>KSFs Product innovation Process techno- Cost efficiency Overhead red- logy. Design. uction, ration- alization, low </li></ul><ul><li> cost sourcing </li></ul>
  20. 20. 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
  21. 21. 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
  22. 22. ROI at Different Stages of the Industry Life Cycle
  23. 23. 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”
  24. 24. 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
  25. 25. Adaptation and Change <ul><li>Sources of Inertia </li></ul><ul><ul><li>Routines: Core capabilities become core rigidities </li></ul></ul><ul><ul><li>Social and political structures </li></ul></ul><ul><ul><li>Conformity: institutional isomorphism and legitimacy-seeking </li></ul></ul><ul><ul><li>Complementarities between strategy, structure, and systems </li></ul></ul><ul><ul><ul><li>Tendency for punctuated equilibrium </li></ul></ul></ul><ul><ul><li>Limited search and blinkered perceptions </li></ul></ul>
  26. 26. Preparing for the Future : The Role of Scenario Analysis in Adapting to Industry Change <ul><li>Stages in undertaking multiple Scenario Analysis: </li></ul><ul><ul><ul><li>Identify major forces driving industry change </li></ul></ul></ul><ul><ul><ul><li>Predict possible impacts of each force on the industry environment </li></ul></ul></ul><ul><ul><ul><li>Identify interactions between different external forces </li></ul></ul></ul><ul><ul><ul><li>Among range of outcomes, identify 2-4 most likely/ most interesting scenarios : configurations of changes and outcomes </li></ul></ul></ul><ul><ul><ul><li>Consider implications of each scenario for the company </li></ul></ul></ul><ul><ul><ul><li>Identify key signposts pointing toward the emergence of each scenario </li></ul></ul></ul><ul><ul><ul><li>Prepare contingency plan </li></ul></ul></ul>
  27. 27. Change strategies <ul><li>Problem of disruptive technologies (Christensen) </li></ul><ul><ul><li>Create separate units </li></ul></ul><ul><ul><ul><li>ambidextrous organizations </li></ul></ul></ul><ul><li>Plan to cross the chasm (Moore) </li></ul><ul><ul><li>Fundamental change in product and distribution – work backwards </li></ul></ul>
  28. 28. 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 ?
  29. 29. 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
  30. 30. Case: Video Games <ul><li>Which companies have been most successful in each generation? What were the key success factors? </li></ul><ul><li>Are the key success factors changing for the next generation? </li></ul><ul><li>What strategy should your company (Microsoft, Sony, Nintendo) pursue for the next generation? </li></ul>