Differentiation Advantage The nature of differentiation Differentiation and segmentation Analyzing differentiation: the demand side Analyzing differentiation: the supply side Bringing it all together: value chain analysis OUTLIN E

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, exclusivity, identity TANGIBLE DIFFERENTATION Observable product characteristics: size, color, materials, etc. performance packaging complementary services 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 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: 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 vs. Cost Leadership as a Basis for Competitive Advantage Highest return on equity among top 200 US companies, 2002 (%) (% ) Colgate Palmolive367.8Gillette53.8 Caremark Rx303.2H.J. Heinz48.5 American Standard161.4Pfizer45.7 Yum Brands 98.1Dell Computer43.0 Kellogg 80.5TJX41.3 Anheuser-Busch 63.4Oracle36.4 Nextel Communications 58.3PepsiCo35.6 Sara Lee 58.03M32.9 Altria Group 57.0Eli Lilly32.7 Wyeth 54.5Sysco31.9 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 SYSTEM Augmentation: repackaging of hardware and software PRODUCTS & SERVICES Decommoditization COMMODIT Y PRODUCTS & SERVICES Commoditization Desystematization : some packages unbundled

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 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

SYSTEMPRODUCT SERVICE COMMODITY SUPPORT (SOFTWARE) Differentiated Undifferentiated Differentiated MERCHANDISE (HARDWARE) Undifferentiated Differentiation of Hardware and Software

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.

Producer’s strategies High quality Low quality High 7 10 Consumer’s price 7 -5 strategies Low -5 3 price 10 3 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 problem of experience goods : quality can only be ascertained after purchase. Hence: Prisoner’s Dilemma:- 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 Problem of Quality in Experience Goods: A “Prisoner’s Dilemma” Problem of Quality in Experience Goods: A “Prisoner’s Dilemma”

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

Using the Value Chain to Identify Differentiation Potential on the Supply Side FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT INBOUND OPERATIONS OUTBOUND MARKETINGSERVICE LOGISTICSLOGISTICS & 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 CANNERCAN MAKER