Differentiation 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 Nature of 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: DIFFERENTATION
• size, color, materials, etc. Unobservable and subjective
• performance characteristics relating to
• packaging image, status, exclusivity,
• complementary services identity
TOTAL CUSTOMER RESPONSIVENESS
Differentiation not just about the product, it embraces the whole
relationship between the supplier and the customer.
Differentiation and 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 vs. Cost Leadership as a
Basis for Competitive 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 and the Product Life 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
COMMODIT
Y
Analyzing the Demand Side
Techniques for analyzing product attributes and
positioning:
• Multidimensional Scaling
• Conjoint Analysis
• Hedonic Price Analysis
Differentiation in Pain Relievers:
Multidimensional Scaling of Competing
Products in the U.S.
High
Tylenol
Low High
Bufferin EFFECTIVENESS
Bayer
Private
label Anacin
aspirin Excedrin
Low
GENTLENESS
Identifying Differentiation Potential:
The Demand 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 positioning in
criteria do
attributes relation to product
they choose?
THE attributes
What price
CUSTOMER • Select target
premiums do
customer group
product attributes
command? • Ensure customer /
What product
What are compatibility
motivates demographic,
them? sociological, • Evaluate costs
psychological and benefits of
correlates of differentiation
customer behavior?
Differentiation of Hardware and Software
SUPPORT
(SOFTWARE)
Differentiated Undifferentiated
Differentiated SYSTEM PRODUCT
MERCHANDISE
(HARDWARE)
Undifferentiated SERVICE COMMODITY
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.
Problem of Quality in Experience Goods:
A “Prisoner’s Dilemma”
The problem of experience goods : quality can only be
ascertained after purchase. Hence: Prisoner’s Dilemma:-
Producer’s strategies
High quality Low quality
High 7 10
Consumer’s 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 Impact of Quality on 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 the Value Chain to Identify
Differentiation Potential on the Supply 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 Differentiation Opportunities through
Linking the Value Chains of the Firm and its
Customers: Can 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 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.
