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Differentiation Advantage The nature of differentiation Differentiation and segmentation Analyzing differentiation: the demand side Analyzing differentiation:

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Presentation on theme: "Differentiation Advantage The nature of differentiation Differentiation and segmentation Analyzing differentiation: the demand side Analyzing differentiation:"— Presentation transcript:

1 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

2 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, exclusively, 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

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)

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 Systems73.4 Microsoft 35.4 Oracle65.1 Safeway35.2 Solectron61.7 Freddy Mac34.8 Dell Computer56.9 Washington Mutual34.4 Best Buy51.3J.P. Morgan Chase33.3 Applied Materials49.8Pfizer32.1 Sun Microsystems45.2 Lowes31.6 Merrill Lynch41.1 Enron31.3 CitiGroup40.8 Walgreen30.7 Intel38.2 Wells Fargo30.1 Goldman Sachs38.2 Cigna30.0 General Dynamics38.1Cardinal Health29.6 Texas Instruments36.3Tech Data29.4 UnitedHealth Group35.7 Houshold International29.4 QUESTION: Which is the primary basis for competitive advantage in the above companies: cost or differentiation?

5 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

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

7 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

8 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

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

10 Consistency of Differentiation Strategy: Product Integrity Key to successful differentiation is consistency of all aspects of the firms 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..

11 Producers strategies High quality Low quality High 7 10 Consumers 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: Prisoners 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 Prisoners Dilemma Problem of Quality in Experience Goods: A Prisoners Dilemma

12 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

13 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

14 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 customers 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 canners 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


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