Strategic Management John D. Macomber Lecture Notes: in Germany (9-501-070) Differentiation KONE: The Monospace Launch2 Differentiation Strategy (Competitive Advantage Ch. 4) • A firm differentiates itself if it can be unique at something that is valuable to buyers. • • • If the customers don't a) buy more of it or b) pay a premium for it, it's not successful differentiation. MIT / MUST Strategic Management John Macomber Real life caveat #1: Is it truly unique? Real life caveat #2: Is it truly valuable?3 Buyer Value and Differentiation • The starting point for understanding whatis valuable to the buyer is the buyer'svalue chain. • A firm creates value for a buyer thatjustifies a premium price (or preference atan equal price) through two mechanisms: • that's all. MIT / MUST Strategic Management John Macomber 1. By lowering buyer cost 2. By raising buyer performance4 The Value Chain and Buyer Value A firm lowers buyer cost or raises buyer performancethrough the impact of its value chain on the buyer'svalue chain. Lowering Buyer Cost • Lower delivery, installation, or financing cost • Lower the required rate of usage of the product • Lower the direct cost of using the product • Lower the indirect cost of using the product • Lower the buyer cost in other activities unconnectedwith the physical product • Lower the risk of product failure and thus the buyer'sexpected cost of failure. MIT / MUST Strategic Management John Macomber5 Buyer Perception of Value BUYERS WILL NOT PAY FOR VALUE THAT THEY DO NOT PERCEIVE, – no matter how real it may be. • Thus, the price premium a firmcommands will reflect both the value actually delivered to the buyer, AND • the extent to which the buyerperceives this value. MIT / MUST Strategic Management John Macomber6 Signaling Criteria (of Value) • reputation or image • cumulative advertising • outward appearance of the product • packaging and labels • appearance and size of facilities • time in business • installed base • customer list • market share • price (where price connotes quality) MIT / MUST Strategic Management John Macomber7 Sustainability • A firm differentiates itself if it can be unique at something that is valuableto buyers. • Differentiation will not lead to a premium price in the long run unlessits sources remain valuable to the buyer and cannot be imitated bycompetitors. MIT / MUST Strategic Management John Macomber8 Pitfalls in Differentiation • Uniqueness that is not valuable • Too big a price premium • Ignoring the need to signal value • Focus on the product instead of the whole value chain • Failure to recognize buyer segments • Not knowing the cost of differentiation MIT / MUST Strategic Management John MacomberStrategic Management John D.