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 OUTLINE

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 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 TO CREATE VALUE FOR THE CUSTOMER

Differentiation and Segmentation DOES DIFFERENTIATION IMPLY SEGMENTATION? —Not necessarily, depends upon the differentiation strategy: BROAD SCOPE DIFFERENTIATIONAppealing to what is common between different customers (Honda, Gillette) FOCUSED DIFFERENTIATIONAppealing to what distinguishes different customer groups (MTV Harley-Davidson) 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)

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

HEDONIC PRICING (Moneyball!) 1 Hedonic pricing supposes that a good or service has a number of characteristics that individually give it value to the purchaser. The market price of the good is then assumed to be a function, typically a linear combination, of the prices of the characteristics.

Characteristics and factory price of cheapest 4-passenger car, 1920 weight wheelbase brake price ($) (lbs) (inches) horsepower Chrysler General Motors Graham–Paige Hudson Hupp Nash–Kelvinator Studebaker Willys–Overland price = – weight wheelbase horsepower (1667) (0.43) (23.64) (8.50) R 2 = ^ The coefficients indicate that an extra pound of weight adds $1.13 to the value of a car, an extra inch of wheelbase $10.11, and one extra horsepower $18.28, with the weight and horsepower coefficients being significant at the 1 percent level, despite the tiny size of the sample. HEDONIC PRICING

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

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