1. Harley Davidson n By 1980, Harley Davidson is pushed to the brink of bankruptcy by Japanese producers (Honda, Yamaha) who offer greater reliability at lower prices. BSA & Triumph ceased production. n Compared to BMW & Honda, Harley sells technologically backward, overpriced motorcycles, yet still dominates the super-heavyweight segment of the U.S. market. n Harley wins through differentiation; notably offering an image and lifestyle that embodies adventure, defiance, and rugged individualism. Harley cultivates this image in the U.S. through Harley Owner’s group events. n Harley uses its brand name (valued at $6 billion) to sell other products offering the same image; the profitability of its licensed products is extremely high.

2. Differentiation Advantages n Differentiation allows a firm to command a premium price for its product or service. n Competitive advantage is realized if the value of the price premium is greater than the cost of differentiation. n Differentiation strategies require a deeper understanding of the customer’s needs (customer value chain) than cost-based strategies. This typically requires an in-depth customer segmentation analysis. n Differentiation strategies often require a different firm value chain with appropriate linkages between the value chain of the firm and that of the customer (e.g., Dell provides desired customization for each customer). n Differentiation may be more sustainable than cost leadership because it is build on features that are harder to imitate.

3. Achieving Differentiation Advantage How one goes about obtaining a differentiation advantage depends upon the nature of the product/service: Observable Goods: the buyer can easily form accurate judgements about the quality of a product. Experience Goods: the buyer finds it difficult and/or costly to determine the quality of the product prior to purchase and use. Communication/Network Goods: the value to the buyer rises as the number of buyers and users increases. And it embraces the whole relationship between supplier and customer

4. Differentiating Observable Goods By differentiating an observable good the producer acts to reduce the total cost of use to the buyer. Very often this requires an increase in product price. But in successful differentiation the price increase is more than offset by a reduction in the costs experienced by the buyer. The aim is not be the low cost producer but TO BE THE LOW COST PROVIDER. Manufacturer's Value Added Engineering Labor Marketing Distribution Administration Product Price Raw Materials Buyer’s Costs Search Learning Switching Risk/loss Performance Service Total Cost of Use to Buyer

5. The average personal computer software program sold for $100, but imposed an additional $120 in costs on the average buyer. Strategic opportunities for reducing buyer costs were much more significant than those associated with reducing product cost or price. AVERAGE PRODUCT PRICE $100 AUTHOR 5% PUBLISHER 40% DISTRIBUTION15% RETAILER40% AVERAGE BUYER COST OF PURCHASE AND USE $120 Magazines10% Risk/Loss15% Search and Evaluation25% Learning50% Software Buyer’s Costs Software Buyer’s Costs

6. Differentiation-Based Strategy User’s Total Cost of New Software Product Price Search Evaluation Learning Risk Adaptation Utility Software Resources

7. Firm A: Firm B: Price Total cost to buyer Producer’s cost Producer’s margin Buyer’s cost Firm A has a cost advantage Value Chains for Cost Advantage and Differentiation Advantage Firm C: Firm B: Price Firm C has a differentiation advantage Price

8. Strategic Positioning n The essence of strategic positioning is to make choices that are different from those of rivals n Strategy is not a race to one ideal position --- it is the creation of a different position n Differences in positioning are necessary but not sufficient for sustainable competitive advantage – Sustainable advantage depends on barriers to imitation – Advantage is magnified by mutual reinforcement across activities