1. Differentiation Advantage
OUTLINE
The nature of differentiation
Differentiation and segmentation
Analyzing differentiation: the demand side
Analyzing differentiation: the supply side
Bringing it all together: value chain analysis 23

2. 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
Observable product characteristics
size, color, materials, etc.
performance
packaging
complementary services
INTANGIBLE DIFFERENTATION
Unobservable and subjective
characteristics relating to image,
status, exclusively, identity
TOTAL CUSTOMER RESPONSIVENESS
differentiation not just about the product, it embraces the whole relationship
between the supplier and the customer. 24

3. Differentiation and Segmentation
DIFFERENTIATION: is concerned with how a firm competes within
a market.
SEGMENTATION: is concerned with where a firm competes
within a market.
Does differentiation imply segmentation?
Not necessarily, depends upon the differentiation strategy:
BROAD SCOPE DIFFERENTIATION: Appealing to what is in common between different customers (McDonalds hamburgers, Honda cars, Sears)
FOCUSED DIFFERENTIATION: Appealing to what distinguishes different customer groups (BMW, Doc Marten footwear) 25

4. Differentiation vs. Cost Leadership as a Basis for Sustained Competitive Advantage
Highest returns to shareholders among the Fortune 200,
Av. annual return (%) Av. annual return (%)
Cisco Systems Microsoft
Oracle Safeway 35.2
Solectron Freddy Mac 34.8
Dell Computer Washington Mutual 34.4
Best Buy J.P. Morgan Chase 33.3
Applied Materials Pfizer
Sun Microsystems Lowe’s
Merrill Lynch Enron
CitiGroup Walgreen 30.7
Intel Wells Fargo 30.1
Goldman Sachs Cigna
General Dynamics Cardinal Health 29.6
Texas Instruments Tech Data 29.4
UnitedHealth Group Houshold International 29.4
QUESTION: Which is the primary basis for competitive advantage
in the above companies: cost or differentiation? 26

5. Differentiation and the Product Life Cycle
New packages of hardware and software introduced
Augmentation: repackaging of hardware and software
SYSTEM
Desystematization: some packages unbundled
PRODUCTS & SERVICES
PRODUCTS & SERVICES
Decommoditization
Commoditization
COMMODITY 31

6. Analyzing the Demand Side
Techniques for analyzing product attributes and
positioning:
Multidimensional Scaling
Conjoint Analysis
Hedonic Price Analysis 27

7. Differentiation in Pain Relievers: Multidimensional Scaling of Competing Products in the U.S.
High
Tylenol
Low
High
Bufferin
EFFECTIVENESS
Bayer
Private label aspirin
Anacin
Excedrin
Low
GENTLENESS 28

8. Identifying Differentiation Potential: The Demand Side
What needs does it satisfy?
THE PRODUCT
What are key attributes?
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
Relate patterns of customer preferences to product attributes
By what criteria do they choose?
THE CUSTOMER
What price premiums do product attributes command?
What motivates them?
What are demographic, sociological, psychological correlates of customer behavior? 29

9. Differentiation of Hardware and Software
SUPPORT
(SOFTWARE)
Differentiated Undifferentiated
SYSTEM PRODUCT
SERVICE COMMODITY
Differentiated
MERCHANDISE
(HARDWARE)
Undifferentiated 30

10. 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.. 32

11. 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
Consumer’s price
strategies
Low
price
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. 33

12. The Impact of Quality on Profitability
ROI (%) Relative Price Relative Direct Cost
Relative product quality
Low 33% % High
Relative product quality
Low 33% % High
Relative product quality
Low 33% % High
Low 25% % High
Relative market share
Low 25% % High
Relative market share
Low 25% % High
Relative market share
Conclusion: Increases in quality add more to price then they do to cost. 34

13. Using the Value Chain to Identify Differentiation Potential on the Supply Side
MIS that supports fast response capabilities
Training to support customer service excellence
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
INBOUND OPERATIONS OUTBOUND MARKETING SERVICE
LOGISTICS LOGISTICS & SALES
Unique product features. Fast new product development
Customer technical support. Consumer credit. Availability of spares
Quality of components & materials
Defect free products. Wide variety
Fast delivery. Efficient order processing
Building brand reputation 35

14. Service & technical support
Identifying Differentiation Opportunities through Linking the Value Chains of the Firm and its Customers: Can Manufacture 1
Inventory holding
Service & technical support
Manufacturing
Purchasing
Design Engineering
Distribution
Sales 5 2 3 4
Inventory holding
Purchasing
Processing
Distribution
Marketing
Canning
Supplies of steel
& aluminum
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. 36