Differentiation AdvantageThe Nature of DifferentiationDifferentiation and SegmentationDifferentiation vs. Cost Leadership as a Basis for Competitive AdvantageDifferentiation and the Product Life CycleAnalyzing the Demand SideDifferentiation in Pain Relievers: Multidimensional Scaling of Competing Products in the U.S.Identifying Differentiation Potential: The Demand SideDifferentiation of Hardware and SoftwareConsistency of Differentiation Strategy: Product IntegrityPowerPoint PresentationThe 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 ManufactureDifferentiation 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 relating to image, status, exclusivity, identity 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 CREATING VALUE FOR THE CUSTOMERDifferentiation and SegmentationDifferentiation and SegmentationDOES DIFFERENTIATION IMPLY SEGMENTATION?--Not necessarily, depends upon the differentiation strategy:BROAD SCOPE DIFFERENTIATION: Appealing to what is in 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 vs. Cost Leadership as a Basis for Competitive AdvantageDifferentiation vs. Cost Leadership as a Basis for Competitive AdvantageHighest return on equity among top 200 US companies, 2002 (%) (%)Colgate Palmolive 367.8 Gillette 53.8Caremark Rx 303.2 H.J. Heinz 48.5American Standard 161.4 Pfizer 45.7Yum Brands 98.1 Dell Computer 43.0Kellogg 80.5 TJX 41.3Anheuser-Busch 63.4 Oracle 36.4Nextel Communications 58.3 PepsiCo 35.6Sara Lee 58.0 3M 32.9Altria Group 57.0 Eli Lilly 32.7Wyeth 54.5 Sysco 31.9QUESTION: Which is the primary basis for competitive advantage in the above companies: cost or differentiation?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•Conjoint Analysis•Hedonic Price AnalysisDifferentiation 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 aspirinIdentifying 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 differentiationSYSTEM PRODUCT SERVICE COMMODITYSUPPORT(SOFTWARE)Differentiated UndifferentiatedDifferentiatedMERCHANDISE(HARDWARE)UndifferentiatedDifferentiation of Hardware and SoftwareDifferentiation of Hardware and SoftwareConsistency of Differentiation Strategy: Product IntegrityConsistency of Differentiation Strategy: 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.Producer’s strategiesHigh quality Low quality High 7 10Consumer’s price 7 -5strategies 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: Prisoner’s 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 priceProblem of Quality in Experience Goods: A “Prisoner’s Dilemma”Problem of Quality in Experience Goods: A “Prisoner’s Dilemma”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 add more to price then they do to cost. 19 28 38 107 107 108 104 103 101 14