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					       Differentiation Advantage

                     OUTLIN
                       E
• The nature of differentiation

• Differentiation and segmentation

• Analyzing differentiation: the demand side

• Analyzing differentiation: the supply side

• Bringing it all together: value chain analysis
                 The Nature of Differentiation
  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!
  TANGIBLE DIFFERENTATION                            INTANGIBLE
Observable product characteristics:               DIFFERENTATION
• size, color, materials, etc.            Unobservable and subjective
• performance                             characteristics that appeal to
• packaging                               customer’s image, status,
• complementary services                  identity, and desire for exclusivity


                 TOTAL CUSTOMER RESPONSIVENESS
       Differentiation not just about the product, it embraces the whole
       relationship between the supplier and the customer.
           Differentiation and Segmentation

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)

DOES 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 and the Product Life Cycle

                          New packages of hardware
                           and software introduced



 Augmentation:                    SYSTEM                    Desystematization
 repackaging of                                             : some packages
  hardware and                                                  unbundled
    software

                  PRODUCTS                           PRODUCTS
                  & SERVICES                         & SERVICES



Decommoditization                                           Commoditization
                                 COMMODIT
                                    Y
        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)
               Differentiation in Pain Relievers:
            Multidimensional Scaling of Competing
                      Products in the U.S.

                                     High


                                     Tylenol



Low                                                              High

                                     Bufferin              EFFECTIVENESS

                      Bayer
  Private
  label               Anacin
  aspirin                                       Excedrin

                                     Low

                               GENTLENESS
       VALUE CURVE for U.S. WINE
       INDUSTRY – YELLOW TAIL
High


                                                                                           Expensive
                                                                                           wines
                                                                                           Yellow tail
                                                                                           Cheap wines
Low
       Price         Above-the-line             Vineyard                Wine                Ease of
                     marketing                  prestige                range              selection

         Use of technical             Aging                  Wine              Easy                     Fun and
         wine terminology             quality              complexity       drinkability               adventure
           Identifying Differentiation Potential:
                     The Demand Side

THE PRODUCT       What needs           What are key
                 does it satisfy?       attributes?          FORMULATE
                                                          DIFFERENTIATION
                                     Relate patterns of       STRATEGY
                                         customer
                                      preferences to      • Select product
                     By what
                                          product         positioning in
                    criteria do
                                         attributes       relation to product
                  they choose?
   THE                                                    attributes
                                        What price
CUSTOMER                                                  • Select target
                                       premiums do
                                                          customer group
                                     product attributes
                                        command?          • Ensure customer /
                   What                                   product
                                         What are         compatibility
                 motivates             demographic,
                  them?                sociological,      • Evaluate costs
                                      psychological       and benefits of
                                       correlates of      differentiation
                                    customer behavior?
          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?
                    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?
                                       The Impact of Quality on Profitability



                                           ROI (%)                                                 Relative Price                                 Relative Direct Cost




                                                             Relative product quality




                                                                                                                      Relative product quality
Relative product quality




                                                                                        67% High




                                                                                                                                                 67% High
                           67% High




                                      19     28      38                                            107 107     108                                          104   103 101


                                      14     20      28                                            103 104     104                                          104   102 100
                                                                                        Low 33%




                                                                                                                                                 Low 33%
                           Low 33%




                                       7    16       23                                            101   101   102                                          104   102 100

                             Low 25%              60% High                                     Low 25%     60% High                                   Low 25%      60% High

                           Relative market share                                             Relative market share                                  Relative market share



                                       Conclusion: Increases in quality typically add more to price than they do
                                       to cost.
            Using the Value Chain to Identify
      Differentiation Potential on the Supply Side
     MIS that supports            Training to support                Unique product features.
      fast response                customer service                     Fast new product
       capabilities                   excellence                          development


 FIRM INFRASTRUCTURE
 HUMAN RESOURCE MANAGEMENT
 TECHNOLOGY DEVELOPMENT


 INBOUND        OPERATIONS        OUTBOUND          MARKETING         SERVICE
 LOGISTICS                        LOGISTICS             & SALES
                                                                                Customer technical
                                                                                support. Consumer
                                                                                credit. Availability of
  Quality of     Defect free    Fast delivery.      Building brand                      spares
components &      products.     Efficient order       reputation
  materials      Wide variety    processing
                       Identifying Differentiation Opportunities through
                         Linking the Value Chains of the Firm and its
                                 Customers: Can Manufacture


                                                                         1
                                                                                                                                                                        5
                                                                                2                                        3                                  4




                                                                                                                                                                             Inventory holding
   Supplies of steel




                                       Inventory holding




                                                                                             Inventory holding




                                                                                                                                        technical support
                                                                             Manufacturing




                                                                                                                                                                                                                                    Distribution
     & aluminum




                                                                                                                                                                Purchasing


                                                                                                                                                                                                 Processing
                                                           Engineering




                                                                                                                 Distribution




                                                                                                                                                                                                                        Marketing
                          Purchasing




                                                                                                                                                                                                              Canning
                                                                                                                                            Service &
                                                             Design




                                                                                                                                Sales




                                                                                                                                  CAN MAKER                                                                             CANNER

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.
  Industry Evolution

            OUTLIN
              E
• The industry life cycle
• Industry structure, competition, and
  success factors over the life cycle.
• Anticipating and shaping the future.
                        The Industry Life Cycle
Industry Sales




                 Introduction     Growth           Maturity              Decline

                                              Time
                 Drivers of industry evolution :
                           • demand growth
                           • creation and diffusion of knowledge
                           • emergence of a dominant design and common
                              technical standards
Product and Process Innovation Over Time


                     Product Innovation
Rate of innovation




                                                 Process Innovation




                                          Time
      Standardization of Product Features in Cars


FEATURE                 INTRODUCTION         GENERAL ADOPTION
Speedometer            1901 by Oldsmobile   Circa 1915
Automatic transmission 1st installed 1904   Introduced by Packard as an
                                            option, 1938. Standard on
                                            Cadillacs early 1950
Electric headlamps      GM introduces 1908 Standard equipment by 1916
All-steel body          GM adoptes 1912     Standard by early 1920s
All-steel enclosed body Dodge 1923          Becomes standard late 1920s
Radio                   Optional extra 1923 Standard equipment, 1946
Four-wheel drive        Appeared 1924       Only limited availability by 1994
Hydraulic brakes        Introduced 1924     Became standard 1939
Shatterproof glass      1st used 1927       Standard features in Fords 1938
Power steering          Introduced 1952     Standard equipment by 1969
Antilock brakes         Introduced 1972      Standard on GM cars in 1991
Air bags                GM introduces 1974   By 1994 most new cars equipped
                                             with air bags
    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
                                                Color
                                        B&W             Portable

               1900 50 90 07           1930    50 70      90   07
                MOTORCYCLES                   TV’s             HDTV
                                                               ?
• 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
       Evolution of Industry Structure over the Life Cycle

                INTRODUCTION         GROWTH                 MATURITY           DECLINE
DEMAND          Affluent buyers      Increasing            Mass market      Knowledgeable,
                                     penetration           replacement      customers, resi-
                                                           demand           dual segments

TECHNOLOGY      Rapid product        Product and        Incremental         Well-diffused
                innovation           process innovation innovation          technology

PRODUCTS        Wide variety,       Standardization        Commoditiz-      Continued
                rapid design change                        ation            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
          The Driving Forces of Industry Evolution

BASIC CONDITIONS            INDUSTRY STRUCTURE                     COMPETITION

Customers become
more knowledgeable             Customers become
  & experienced                more price conscious
                                                                    Quest for new
                                                                    sources of
                                                                    differentiation
                                 Products become
                                 more standardized

     Diffusion of
                                                                   Price competition
     technology         Production                                     intensifies
                                               Production shifts
                        becomes less R&D
                                                 to low-wage
                        & skill-intensive
                                                   countries


                                   Excess capacity
                                   increases
   Demand growth                                                   Bargaining power
   slows as market                                                  of distributors
saturation approaches           Distribution channels                 increases
                                      consolidate
Strategy and Performance across the Industry Life Cycle

 12
                                                                                                                                                     Growth
 10                                                                                                                                                  Maturity
                                                                                                                                                     Decline
  8

  6

  4

  2
                                                                                                                                           Note: The figure
                                                                                                                                           shows
  0
            Added/Revenue




                                                                                                                                           standardized means
                                                                       R&D/Sales




                                                                                                                       Advertising/Sales
      ROI




                                                                                   Age of Plant &


                                                                                                    Investment/Sales
                            Technical


                                        New Products

                                                        % Sales from
                                                       New Products
                             Change




                                                                        Product


                                                                                                                                           for each variable for
                                                                                      Equip.                                               businesses at each
                Value




                                                                                                                                           stage of the life cycle.
ROI at Different Stages of the Industry Life Cycle


          25

          20

          15                             Real annual
ROI (%)                                  growth rate <3%
          10                             Real annual
                                         growth rate 3-6%
           5                             Real annual
                                         growth rate >6%
           0
               Growth Maturity Decline
  Changes in the Population of Firms over the
Industry Life Cycle: US Auto Industry 1885-1961
                                                                     “Organizational Ecology”
 250

 200

 150
                                                                          No. of firms
 100

   50

     0
         1895   1905    1915     1925    1935     1945     1955


Source: S. Klepper, Industrial & Corporate Change, August 2002, p. 654.
The World’s Biggest Companies, 1912 and 2006
                          (by market capitalization)

                   1912               $ bn.               2006    $ bn.


US Steel                             0.74     Exxon Mobil         372
Exxon                                0.39     General Electric    363
J&P Coates                           0.29     Microsoft           281
Pullman                              0.20     Citigroup           239
Royal Dutch Shell                    0.19     BP                  233
Anaconda                             0.18     Bank of America     212
General Electric                     0.17     Royal Dutch Shell   211
Singer                               0.17     Wal-Mart Stores     197
American Brands                      0.17     Toyota Motor        197
Navistar                             0.16     Gazprom             196
BAT                                  0.16     HSBC                190
De Beers                             0.16     Procter & Gamble    190
        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
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
       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
              Innovation & Renewal over the
               Industry Life Cycle: Retailing
                                      Warehouse
                                        Clubs                  Internet
                                   e.g. Price Club             Retailers
                                      Sam’s Club             e.g. Amazon;
                           Discount                             Expedia
                                                 ―Category
                            Stores                 Killers‖
                          e.g. K-Mart          e.g. Toys-R-Us,
Mail order,                Wal-Mart
catalogue
                Chain
                                                Home Depot             ?
retailing       Stores
               e.g. A&P
e.g. Sears
    Roebuck




  1880s           1920s               1960s                        2000
               Gary Hamel: Shaking the Foundations
      OLD BRICK                              NEW BRICK
Top management is responsible          Everyone is responsible
for setting strategy                   for setting strategy

Getting better, getting faster         Rule-busting innovation
is the way to win                      is the way to win

IT creates competitive advantage       Unconventional business concepts
                                       create competitive advantage

Being revolutionary is high risk       More of the same is high risk

We can merge our way to                There’s no correlation between
competitiveness                        size and competitiveness

Innovation equals new products         Innovation equals entirely new
and new technology                     business concepts

Strategy is the easy part,             Strategy is the easy only if you’re
Implementation the hard part           content to be an imitator

Change starts at the top               Change starts with activists

Our real problem is execution          Our real problem is execution

Big companies can’t innovate           Big companies can become gray-haired
                                       revolutionaries
        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?

				
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