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 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 Potentially more durable than cost leadership!

3. Differentiation and Segmentation DOES DIFFERENTIATION IMPLY SEGMENTATION? —Not necessarily, depends upon the differentiation strategy: BROAD SCOPE DIFFERENTIATIONAppealing to what is common between different customers (McDonalds, Honda, Gillette) FOCUSED DIFFERENTIATIONAppealing 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)

4. 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

5. Analyzing the Demand Side Techniques for analyzing product attributes and positioning: Multidimensional Scaling (implied preferences) Conjoint Analysis (stated preferences) Hedonic Price Analysis (revealed preferences) Value Curve Analysis (Chan & Mauborgne)

6. 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

7. VALUE CURVE for U.S. WINE INDUSTRY – YELLOW TAIL Expensive wines Yellow tail Cheap wines Price Use of technical wine terminology Above-the-line marketing Aging quality Vineyard prestige Wine complexity Wine range Easy drinkability Ease of selection Fun and adventure Low High

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. Supply Side: 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. Examples?

10. Signaling and Reputation Akerlof: The market for lemons –A form of prisoner’s dilemma –Especially problematic with “experience” and “credence” goods (as opposed to “search” goods) Vitamin supplements Education Car repairs Many forms of medical treatment Home maintenance services, such as plumbing and electricity. Estate agents Solutions –Warranties, money back guarantees, brand advertising, sponsorship, retail environment –Premium pricing and advertising are complementary –Are brands more a signal of reliability or identity/lifestyle?

11. 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 typically add more to price than they do to cost. 19 28 38 107 107 108 104 103 101 14 20 28 103 104 104 104 102 100 7 16 23 101 101 102 104 102 100

12. 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

13. 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 1 2 4 5 3

14. Industry Evolution The industry life cycle Industry structure, competition, and success factors over the life cycle. Anticipating and shaping the future. OUTLIN E

15. The Industry Life Cycle Drivers of industry evolution : demand growth creation and diffusion of knowledge emergence of a dominant design and common technical standards Introduction Growth Maturity Decline Industry Sales Time

16. Product and Process Innovation Over Time Time Rate of innovation Product Innovation Process Innovation

17. Standardization of Product Features in Cars FEATURE INTRODUCTIONGENERAL ADOPTION Speedometer 1901 by OldsmobileCirca 1915 Automatic transmission 1st installed 1904Introduced by Packard as an option, 1938. Standard on Cadillacs early 1950 Electric headlamps GM introduces 1908Standard equipment by 1916 All-steel body GM adoptes 1912Standard by early 1920s All-steel enclosed body Dodge 1923Becomes standard late 1920s Radio Optional extra 1923Standard equipment, 1946 Four-wheel drive Appeared 1924Only limited availability by 1994 Hydraulic brakes Introduced 1924 Became standard 1939 Shatterproof glass 1st used 1927Standard features in Fords 1938 Power steering Introduced 1952Standard equipment by1969 Antilock brakes Introduced 1972Standard on GM cars in 1991 Air bags GM introduces 1974By 1994 most new cars equipped with air bags

18. How Typical is the Life Cycle Pattern? Technology-intensive industries (e.g. pharmaceuticals, semiconductors, computers) may retain features of emerging industries. Other industries (especially those providing basic necessities, e.g. food processing, construction, apparel) reach maturity, but not decline. Industries may experience life cycle regeneration. Sales Sales 1900 50 90 07 1930 50 70 90 07 MOTORCYCLES TV’s Life cycle model can help us to anticipate industry evolution—but dangerous to assume any common, pre- determined pattern of industry development Life cycles may be shortening Color B&W Portable HDTV ?

19. Evolution of Industry Structure over the Life Cycle INTRODUCTION GROWTH MATURITY DECLINE DEMANDAffluent buyersIncreasingMass market Knowledgeable, penetrationreplacement customers, resi- demand dual segments TECHNOLOGYRapid productProduct and Incremental Well-diffused innovation process innovation innovation technology PRODUCTS Wide variety, Standardization Commoditiz- Continued rapid design changeation commoditization MANUFACT-Short-runs, skill Capacity shortage, Deskilling Overcapacity URING intensive mass-production TRADE -----Production shifts from advanced to developing countries----- COMPETITION Technology-Entry & exit Shakeout & Price wars, consolidation exit KSFs Product innovation Process techno- Cost efficiency Overhead red- logy. Design. uction, ration- alization, low cost sourcing

20. The Driving Forces of Industry Evolution Customers become more knowledgeable & experienced Diffusion of technology Demand growth slows as market saturation approaches Customers become more price conscious Products become more standardized Distribution channels consolidate Production shifts to low-wage countries Price competition intensifies Bargaining power of distributors increases BASIC CONDITIONS INDUSTRY STRUCTURE COMPETITION Excess capacity increases Production becomes less R&D & skill-intensive Quest for new sources of differentiation

21. Note: The figure shows standardized means for each variable for businesses at each stage of the life cycle. Strategy and Performance across the Industry Life Cycle

22. ROI at Different Stages of the Industry Life Cycle

23. Changes in the Population of Firms over the Industry Life Cycle: US Auto Industry 1885-1961 Changes in the Population of Firms over the Industry Life Cycle: US Auto Industry 1885-1961 Source: S. Klepper, Industrial & Corporate Change, August 2002, p. 654. “Organizational Ecology”

24. 1912$ bn.2006$ bn. US Steel0.74Exxon Mobil372 Exxon0.39General Electric363 J&P Coates0.29Microsoft281 Pullman0.20Citigroup239 Royal Dutch Shell0.19BP233 Anaconda0.18Bank of America212 General Electric0.17Royal Dutch Shell211 Singer0.17Wal-Mart Stores197 American Brands0.17Toyota Motor197 Navistar0.16Gazprom196 BAT0.16HSBC190 De Beers0.16Procter & Gamble190 The World’s Biggest Companies, 1912 and 2006 (by market capitalization) The World’s Biggest Companies, 1912 and 2006 (by market capitalization)

25. Adaptation and Change Sources of Inertia –Routines: Core capabilities become core rigidities –Social and political structures –Conformity: institutional isomorphism and legitimacy- seeking –Complementarities between strategy, structure, and systems Tendency for punctuated equilibrium –Limited search and blinkered perceptions

26. Preparing for the Future : The Role of Scenario Analysis in Adapting to Industry Change Stages in undertaking multiple Scenario Analysis: Identify major forces driving industry change Predict possible impacts of each force on the industry environment Identify interactions between different external forces Among range of outcomes, identify 2-4 most likely/ most interesting scenarios: configurations of changes and outcomes Consider implications of each scenario for the company Identify key signposts pointing toward the emergence of each scenario Prepare contingency plan

27. Change strategies Problem of disruptive technologies (Christensen) –Create separate units ambidextrous organizations Plan to cross the chasm (Moore) –Fundamental change in product and distribution – work backwards

28. 1880s 1920s 1960s 2000 Mail order, catalogue retailing e.g. Sears Roebuck Chain Stores e.g. A&P Discount Stores e.g. K-Mart Wal-Mart “Category Killers” e.g. Toys-R-Us, Home Depot Internet Retailers e.g. Amazon; Expedia Warehouse Clubs e.g. Price Club Sam’s Club Innovation & Renewal over the Industry Life Cycle: Retailing Innovation & Renewal over the Industry Life Cycle: Retailing ?

29. Gary Hamel: Shaking the Foundations OLD BRICKNEW BRICK Top management is responsible for setting strategy Everyone is responsible for setting strategy Getting better, getting faster is the way to win Rule-busting innovation is the way to win IT creates competitive advantage Unconventional business concepts create competitive advantage Being revolutionary is high riskMore of the same is high risk We can merge our way to competitiveness There’s no correlation between size and competitiveness Innovation equals new products and new technology Innovation equals entirely new business concepts Strategy is the easy part, Implementation the hard part Strategy is the easy only if you’re content to be an imitator Change starts at the top Change starts with activists Our real problem is execution Big companies can’t innovate Big companies can become gray-haired revolutionaries

30. Case: Video Games Which companies have been most successful in each generation? What were the key success factors? Are the key success factors changing for the next generation? What strategy should your company (Microsoft, Sony, Nintendo) pursue for the next generation?