Differentiation AdvantageThe Nature of DifferentiationDifferentiation and SegmentationDifferentiation and the Product Life CycleAnalyzing the Demand SideDifferentiation in Pain Relievers: Multidimensional Scaling of Competing Products in the U.S.VALUE CURVE for U.S. WINE INDUSTRY – YELLOW TAILIdentifying Differentiation Potential: The Demand SideSupply Side: Product IntegritySlide 10The Impact of Quality on ProfitabilityUsing the Value Chain to Identify Differentiation Potential on the Supply SideIdentifying Differentiation Opportunities through Linking the Value Chains of the Firm and its Customers: Can ManufactureIndustry EvolutionThe Industry Life CycleProduct and Process Innovation Over TimeStandardization of Product Features in CarsHow Typical is the Life Cycle Pattern?Evolution of Industry Structure over the Life CycleThe Driving Forces of Industry EvolutionSlide 21Slide 22Slide 23Slide 24Adaptation and ChangePreparing for the Future : The Role of Scenario Analysis in Adapting to Industry ChangeChange strategiesSlide 28Gary Hamel: Shaking the FoundationsCase: Video GamesDifferentiation AdvantageDifferentiation Advantage•The nature of differentiation•Differentiation and segmentation•Analyzing differentiation: the demand side•Analyzing differentiation: the supply side•Bringing it all together: value chain analysisOUTLINEThe Nature of DifferentiationThe Nature of Differentiation TOTAL CUSTOMER RESPONSIVENESSDifferentiation not just about the product, it embraces the whole relationship between the supplier and the customer. INTANGIBLE DIFFERENTATIONUnobservable and subjectivecharacteristics that appeal to customer’s image, status, identity, and desire for exclusivity TANGIBLE DIFFERENTATIONObservable product characteristics:• size, color, materials, etc.• performance• packaging• complementary servicesDEFINITION: “Providing something unique that is valuable to thebuyer beyond simply offering a low price.” (M. Porter)THE KEY IS TO CREATE VALUE FOR THE CUSTOMER Potentially more durable than cost leadership!Differentiation and SegmentationDifferentiation and SegmentationDOES DIFFERENTIATION IMPLY SEGMENTATION? —Not necessarily, depends upon the differentiation strategy:BROAD SCOPE DIFFERENTIATION Appealing to what is common between different customers (McDonalds, Honda, Gillette)FOCUSED DIFFERENTIATION Appealing to what distinguishes different customer groups (MTV Harley-Davidson, Ralph Lauren)DIFFERENTIATION: is concerned with how a firm distinguishesits 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)Differentiation and the Product Life CycleDifferentiation and the Product Life CycleNew packages of hardware and software introducedSYSTEMAugmentation: repackaging of hardware and softwarePRODUCTS & SERVICESDecommoditizationCOMMODITYPRODUCTS & SERVICESCommoditizationDesystematization: some packages unbundledAnalyzing the Demand SideAnalyzing the Demand SideTechniques for analyzing product attributes andpositioning:•Multidimensional Scaling (implied preferences)•Conjoint Analysis (stated preferences)•Hedonic Price Analysis (revealed preferences)•Value Curve Analysis (Chan & Mauborgne)Differentiation in Pain Relievers: Multidimensional Scaling of Competing Products in the U.S.Differentiation in Pain Relievers: Multidimensional Scaling of Competing Products in the U.S.HighLowLow HighEFFECTIVENESSGENTLENESSTylenolBufferinExcedrinBayerAnacinPrivate label aspirinVALUE CURVE for U.S. WINE INDUSTRY – YELLOW TAIL Expensive winesYellow tailCheap winesPriceUse of technicalwine terminologyAbove-the-linemarketingAgingqualityVineyardprestigeWinecomplexityWinerangeEasydrinkabilityEase ofselectionFun andadventureLowHighIdentifying Differentiation Potential: The Demand SideIdentifying Differentiation Potential: The Demand SideTHE PRODUCTTHE CUSTOMERWhat needs does it satisfy?By what criteria do they choose?What motivates them?What are key attributes?Relate patterns of customer preferences to product attributesWhat 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 differentiationSupply Side: Product IntegritySupply Side: Product IntegrityKey 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?Signaling and ReputationSignaling 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?The Impact of Quality on ProfitabilityThe Impact of Quality on ProfitabilityLow 25% 60% HighRelative market shareRelative product qualityLow 33% 67% HighRelative product qualityLow 33% 67% HighRelative product qualityLow 33% 67% HighLow 25% 60% HighRelative market shareLow 25% 60% HighRelative market share ROI (%) Relative Price Relative Direct CostConclusion: 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 100Using the Value Chain to Identify Differentiation Potential on the Supply SideUsing the Value Chain to Identify Differentiation Potential on the Supply SideFIRM