Chapter 9 Differentiation

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Chapter 9 Differentiation

• Satisfying a customer need in a way that
  competition cantand charging a premium price
• Building blocks Q, I, CR
• innovation important for complex products
• after-sales-service/repair important to CR
• product can appeal to prestige/status
• bases of differentiation are nearly endless
• less it resembles rivals, the more protection
  offered

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Differentiation

• Differentiation strategies are not about pursuing
  uniqueness for the sake of being differentbut
  about understanding the need that our product is
  serving and understanding our customers.
• 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 the
  competitors). On the demand side, the key is
  insight into customers and their needs and
  preferences. These two sides form the major
  components of our analysis of differentiation.

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Differentiation Variables

• Tangible dimensions include the observable
  characteristics of a product or service that are
  relevant to consumer preferences.
• Intangible dimensions includes the performance of
  the product/service in terms of reliability,
  consistency, taste, speed, durability, safety,
  etc.

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Differentiation Segmentation

• Differentiation 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, locations,
  and product types.
• However, differentiation decisions are closely
  linked to choices of segments in which to
  compete. Unique product/service offerings may
  inevitably target certain market segments.

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Differentiation

• Imitation is the biggest problem
• Patents first mover advantages last only so
  long
• when differentiation stems from design or
  physical features, imitation is easier
• but if it stems from an intangible resource, then
  imitation is more difficult.
• However, LCL tends to be a less secure basis for
  SCA than differentiation. As a result, firms
  that have been consistently successful over long
  periods tend to be those pursuing differentiation.

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The Demand Side of Differentiation

• Analyzing customer demand enables us to determine
  which product characteristics have the potential
  to create value for customers, those customers
  willingness to pay for differentiation, and a
  companys optimal competitive positioning in
  terms of differentiation variables.
• Product Attributes and Positioning
• Multidimensional scaling
• Conjoint analysis
• Hedonic Price Analysis

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Demand-Side Analysis

• Social and Psychological Factors
• The problem with product attribute analysis is
  that it does not delve into customers underlying
  motivations (e.g. Maslow)
• We must understand customers lifestyles and
  aspirations and the relationship between the
  product and these lifestyles and aspirations.
• This requires more than listeningit requires
  observation.
• Satisfying the customer is not about bundling
  together favored attributes, but is going beyond
  functionality to provide emotional and aesthetic
  satisfaction.

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The Product
What needs does it satisfy?
Formulate Differentiation Strategy
Key attributes?
Relate patterns of customer preferences
to product attributes
Select product positioning in relation
to product attributes Select target customer
group Ensure customer/ product compatibility
Evaluate costs and benefits of differentiation
By what criteria do they choose?
What price premiums do product attributes command?
The Customer
What are the demographic, sociological, psychologi
cal correlates of customer behavior?
What motivates them?
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The Supply Side of Differentiation

• To ID the firms potential to supply
  differentiation, we examine the activities the
  firm performs and the resources to which it has
  access.
• Porter IDs a number of uniqueness drivers
• Product features and product performance
• Complementary services (credit, delivery, repair)
• Intensity of marketing activities
• Technology embodied in design and manufacture
• The quality of purchased inputs
• Procedures influencing the conduct of activities
  (i.e. quality)
• The skill and experience of employees (knowledge)
• Location (e.g. retail, mfg)
• The degree of VI (control of inputs)

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Supply-Side Differentiation

• Product Integrity
• Refers to the consistency of a firms
  differentiation the extent to which a product
  achieves a balance of characteristics such as
  basic functions, aesthetics, semantics,
  reliability, and economy.
• Achieving combined internal and external product
  integrity is critical to all companies that seek
  differentiation advantage.
• A critical factor in such differentiation is the
  ability of employees and customers to identify
  with one another.

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Supply-Side Differentiation

• Signaling and Reputation
• Differentiation is only effective if it is
  communicated.
• Search goods are those whose qualities and
  characteristics can be ascertained by inspection
• Experience goods have qualities that can only be
  detected after consumption or use.
• This presents a classic prisoners dilemma
  equillibrium is established with the customer
  offering a low price and the supplier offering
  low quality productseven though both would be
  better off with high/high.
• Thus signaling occurs through warranties,
  packaging, guarantees, sponsorships, retail
  environment, etc.

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Supply-Side Differentiation

• Brand reputation
• Because a brand is a valuable asset, it acts as a
  disincentive to provide poor quality
• A brand identifies the producer and represents an
  investment that provides an incentive to maintain
  quality and customer satisfaction
• In general, firms with strong brands are better
  performers that firms with weak brands and firms
  that can leverage their brand over several
  markets (GE, Disney) are better performers that
  firms that focus their brand on a single market
  (Levi, Coke).

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The Costs of Differentiation

• Differentiation adds costs!
• The direct costs include higher-quality inputs,
  better-trained employees, higher advertising,
  after-sales service, etc.
• Indirect costs arise through the interaction of
  differentiation variables with cost variables
• If differentiation narrows a firms segment
  scope, it also limits exploitation of EOS.
• If differentiation requires continual product
  upgrades, it limits exploitation of the
  experience curve.
• A method of reconciling these tradeoffs is to
  postpone differentiation to the later stages of
  the value chain (e.g. modular design, flexible
  manufacturing, etc.)