Differentiation Advantage Chapter 9

Introduction A firm differentiates itself from its competitors when it provides something unique that is valuable to buyers beyond simply offering a low price Differentiation /D/ advantage occurs when a firm is able to obtain from its differentiation a price premium in the market that exceeds the cost of providing the differentiation

Introduction Differentiation strategies are not about pursuing uniqueness for the sake of being different. Differentiation is about understanding the need that our product is serving and about understanding our customers

Introduction The fundamental issues of differentiation are also the fundamental issues of business strategy: Who are our customers?How do we create value for them? And how do we do it more effectively and efficiently than anyone else

Introduction Analyzing D. requires looking at both the firm (supply side and its customers (the demand side). On the supply side, the firm must be aware of the resources and capabilities through which it can create uniqueness (and do it better than competitors). On he demand side, the key is insight into customers and their needs and preferences

Objectives Understand what differentiation is, recognize its different forms, and appreciate its potential for creating competitive advantage Analyze the sources of differentiation in terms of customers preferences and characteristics, and of the firms capacity for supplying differentiation. Formulate strategies that create differentiation advantage by linking the firms differentiation capability to customers demand for differentiation

The Nature of Differentiation and Differentiation Advantage. Differentiation Variables The potential for differentiation a product or service is partly determined by its physical characteristics. For a product that is technically simple, or that satisfies uncomplicated needs, or that must meet specific technical standards, differentiation opportunities are constrained by technical and market factors.

The Nature of Differentiation and Differentiation Advantage. Differentiation Variables Products that are complex, that satisfy complex needs, or that do not need to conform to stringent technical standards offer much greater scope for differentiation. D. extends beyond the physical characteristics of the product or service to encompass everything about the product or service that influences the value customers derive from it.

The Nature of Differentiation and Differentiation Advantage. D. Variables Thus, the D. advantage of McDonalds within the fast-food business depends not just on the characteristics of the food it serves or the associated services, but also the values it projects such as happiness, child development, family unity, and care for communities and the natural environment.

Differentiation Variables Ultimately, D. is all about a firms responsiveness to customer requirement. Every action, no matter how small, and no matter how far from firing line a department may be, must be processed through the customers eyes. Will this make it easier for the customer? Faster? Better? Less expensive? Long –term profit equals revenue from continuously happy customer relationships minus cost

Differentiation Variables In analyzing D. opportunities, a basic distinction is between tangible and intangible dimensions of D. Tangible characteristics : size, shape, color,weight, design material,technology,reliability, taste, speed,durability,safety, pre-sales and after- sales services, accessories, availability and speed of delivery,etc. Intangible characteristics : Social, emotional, psychological, aesthetic,etc considerations

Differentiation Variables The desires for status, exclusivity, individuality, and security are extremely powerful motivational forces in choices relating to most consumer goods. Issues of image differentiation are especially important for those products and services whose qualities and performance are difficult to ascertain at the time of purchase(experience goods).

Differentiation and Segmentation D. is concerned with how a firm competes – the ways in which it can offer uniqueness to customers Segmentation is concerned with where a firm competes in terms of customer groups, localities, and product types Whereas segmentation is a feature of market structure, differentiation is a strategic choice by a firm.

A Sustainability of Differentiation Advantage Although strategy analysis has traditionally emphasized cost advantage as the primary basis for establishing a competitive advantage, the low cost tends to be less secure a basis for competitive advantage. Companies that have been consistently successful over long periods tend to be those that have pursued D. rather than cost leadership. Table:Companies Among the

Analyzing Differentiation: The Demand Side. Product Attributes and Positioning Virtually all products and services serve multiple customer needs. As a result, understanding customer needs requires the analysis of multiple attributes. Market research has developed numerous techniques –including multidimensional scaling, conjoint analysis, and hedonic price analysis – can guide the positioning of new products, repositioning of existing products, and setting product prices.

Multidimensional scaling /MDS/ MDS permits customers perceptions of competing products similarities and dissimilarities to be represented graphically and for the dimensions to be interpreted in terms of key product attributes. For example, a survey of consumer ratings of competing pain relievers resulted in the mapping shown in Figure:a MDS- Consumer perceptions of competing pain relievers

Conjoint Analysis Conjoint analysis is a powerful means of analyzing the strength of customer preferences for different product attributes. The technique requires, first, an identification of the underlying attributes of a product and, second, market research to rank hypothetical products that contain alternative bundles of attributes. The results can then be used to estimate the proportion of customers who would prefer a hypothetical new product to competing products already available in the market.

Gedonic Price Analysis The demand for a product may be viewed as the demand for the underlying attributes that the product provides. Price analysis observes price differences for competing products, relates these differences to the different combinations of attributes offered by each product, and calculates the implicit market price for each attribute. In Britain, for example, an automatic washing machine that spins at 1000 rpm sells at about a $200 price premium to one that spins at 800 rpm

The Role of Social and Psychological Factors Market research that looks behind the product and explores the demographic /age, sex, race, location/, socioeconomic /income, education/, and psychographic /lifestyle, personality type/ characteristics of potential customers may be of some value. Satisfying the customer is not about bundling together favored attributes, but is going beyond functionality to provide emotional and aesthetic satisfaction.

Broad-based versus Focused Differentiation Differentiation may focus on a broad market appeal or on a specific market segment. A firm that wishes to establish a broad -based position of D. advantage in an industry is primarily concerned with the general features of market demand: What general needs does a product satisfy? What do different customers have in common in terms of their motivations and choice criteria?

Broad-based versus Focused Differentiation Establishing uniqueness while still appealing to a broad market is no easy task: McDonalds has extended its appeal across age groups, social groups, and national boundaries by emphasizing a few qualities with universal appeal: speed, consistency, value, hygiene, and family lifestyles.

Analyzing Differentiation: The Supply Side D. is concerned with the provision of uniqueness. The Drivers of Uniqueness over which the firm exercises control: Product features and product performance Complementary services Intensity of marketing activities Technology embodied in design and manufacture

The Drivers of Uniqueness The quality of purchased inputs Procedures influencing the conduct of each activities/rigor of quality control,service procedure, etc/ The skill and experience of employees Location The degree of vertical integration

Product Integrity All companies face a range of differentiation opportunities. The primary issue is likely to be determining which forms of D. may be most successful in distinguishing the firm in the market and which are most valued by customers. However, such choices cannot be made on a piecemeal basis.

Product Integrity Product integrity refers to the consistency of a firms differentiation; it is the extent to which a product achieves: total balance of numerous product characteristics including basic functions, aesthetics, semantics, reliability, and economy

Signaling and Reputation D. is only effective if it is communicated to customers.The economics literature distinguishes between search goods, whose qualities and characteristics can be ascertained by inspection, and experience goods, whose qualities and characteristics are only recognized after consumption

Signaling and Reputation Brand names, warranties, expensive packaging, money-back guarantees, sponsorship of sports and cultural events, and a carefully designed retail environment in which the product is sold are all signals of quality. The more difficult it is to ascertain performance prior to purchase, the more important signaling is.

Signaling and Reputation In financial services, the customer cannot easily assess the honesty, financial security, or competence of a broker, fund manager, or insurance company. Hence, financial service companies accord emphasis to symbols of security, stability, and competence – large, well- located head offices; conservative and tasteful office décor; smartly dressed, well-groomed employees; and stress on size and continuity over time.

Signaling and Reputation Quality signaling is primarily important for products whose quality can only be ascertained after purchase/experience goods/ Expenditure on advertising is an effective means of signaling superior quality,since suppliers of low-quality products will not expect repeat buying, hence it is not profitable for them to spend money on advertising.

Signaling and Reputation A combination of premium pricing and advertising is likely to be superior in signaling quality than either price or advertising alone. The higher the sunk costs required for entry into a market and the greater the total investment of the firm, the greater the incentives for the firm not to cheat customers through providing low quality at high prices

Brands A brand provides a guarantee by the producer to the consumer of the quality of the product. At its most basic, a brand identifies the producer of a product. The brand represents an investment that provides an incentive to maintain quality and customer satisfaction.

Brands The more difficult it is to discern quality on inspection, and the greater the cost to the customer of purchasing a defective product, the greater the value of a brand

Value Chain Analysis of Product Goods Using the value chain to identify opportunities for differentiation advantage involves four principal stages: 1. Construct a value chain for the firm and the customer. If the firm suppliers different types of customers, draw separate value chains for each of the main categories of customer.

Value Chain Analysis of Product Goods 2.Identify the drivers of uniqueness in each activity. Assess the firms potential for differentiating its product by examining each activity in the firms value chain and identifying the variables and actions through which the firm can achieve uniqueness in relation to competitors offerings. Figure: Using the value chain to identify differentiation potential on the supply side

Value Chain Analysis of Producer Goods 3.Select the most promising differentiation variables for the firm. Among the numerous drivers of uniqueness that we can identify within the firm, which one should be selected as the primary basis for the firms D.strategy?.On the supply side, there are three important considerations:

Value Chain Analysis of Producer Goods First, we must establish where the firm has greater potential for differentiating, or can differentiate at lower cost, than rivals. Second,in order to identify the most promising aspects of D., we also need to identify linkages among activities. Third, the ease with which different types of uniqueness can be sustained must be considered

Value Chain Analysis of Producer Goods 4. Locate linkages between the value chain of the firm and that of the buyer. To identify the means by which a firm can create value for its customers it must locate the linkages between D. of its own activities and cost reduction and D. within the customers activities. Analysis of these linkages can also evaluate the potential profitability of D.The value D. created for the customer represents the maximum price premium the customer will pay.

Summary The potential for D. in any business is vast. It may involve physical D. of the product, it may be through complementary services, it may be intangible. D. extends beyond technology, design, and marketing to include all aspects of a firms interactions with its customers.