Targets

Differentiation Strategy
J ames Oldroyd
Kellogg Graduate School of Management
Northwestern University

J-oldroyd@northwestern.edu
801-422-7888
650 TNRB
1
To Date
Dual Advantage
Willingness
to Pay
Supplier
opportunity
cost
Differentiation
Goldman
Sachs
Merrill
Lynch
McDonalds
Burger
King
Low Cost
Wal-mart
K-mart
Mom
and Pop
Store
2
Dimensions of Value
Value
Price
Differentiation
Product
Service
Bottom Line
Value
Top Line
Value
Willingness to Pay
Cost
Price
Value Captured by
Customer
Value Captured
by Firm
Value Captured
by Supplier
Supplier Opportunity Costs
Achieving Differentiation Advantage
How one goes about obtaining a differentiation advantage
depends upon the nature of the product/service:
Observable Goods: the buyer can easily form accurate
judgements about the quality of a product.
Experience Goods: the buyer finds it difficult and/or costly to
determine the quality of the product prior to purchase and use.
Communication/Network Goods: the value to the buyer rises as
the number of buyers and users increases.
And it embraces the whole relationship between supplier and
customer
4
Differentiating Observable Goods
By differentiating an observable good the producer acts to reduce the total
cost of use to the buyer. Very often this requires an increase in product
price. But in successful differentiation the price increase is more than
offset by a reduction in the costs experienced by the buyer. The aim is not
be the low cost producer but TO BE THE LOW COST PROVIDER.
Manufacturer's
Value Added
Engineering
Labor
Marketing
Distribution
Administration
Product
Price
Raw
Materials
Buyers Costs
Search
Learning
Switching
Risk/loss
Performance
Service
Total Cost of
Use to Buyer
5
Differentiation-Based Strategy
Users Total Cost of New Software
Product
Price
Search

Learning

Risk

Utility Software
Resources
6
Firm A:
Firm B:
Price
Price
Total cost to buyer
Producers cost Producers margin Buyers cost
Firm A has a
cost advantage
Value Chains for Cost Advantage
and Differentiation Advantage
Firm C:
Firm B:
Price
Firm C has a
differentiation
advantage
Price
7
Strategic Positioning
The essence of strategic positioning is to
make choices that are different from those
of rivals
Strategy is not a race to one ideal position ---
it is the creation of a different position
Differences in positioning are necessary but
not sufficient for sustainable competitive
advantage

Sustainable advantage depends on barriers to
imitation
Advantage is magnified by mutual reinforcement
across activities
8
Road Map
CRM= Customer + Relationship + Management
The Rise and Fall of CRM
Strategic Framework for CRM
Why CRM Fails
Lock-in vs. Loyalty
The Dark Side of Market Focus
Targets Market Focused Strategy and the
Challenges of Implementation
Conclusion
9
Multiple Data Sources
People have typically sought an
understanding of their customer
by using one or two of these
sourcesindependently
Customer
Research
Market Data
Internal
Data
Observation
Data
What is purchased,
not why
Behavioral not
attitudinal
Attitudinal
not behavioral
or fact-based
Market
conditions,
not customer
preferences
GAP
Source: Arthur Anderson, 2002
10
Customer Relationship Management
v To deepen customer relationships.
v To build customer loyalty
v To increase profitability


Purpose of CRM
The Proliferation of CRM
161 CRM companies funded since 1998
$1.3 billion raised by CRM companies
Source: Red Herring May 2002 p. 27
11
Sources of Expense:
Typically $5,000 a seat and $2 million to $5
million per deployment.
CRM systems required data conversion when
consolidating data from multiple legacy systems.
At the enterprise level, CRM software is just
plain difficult.
Additional Investments of $100,000 to $1
million.
Need to hard-wire and hard-code the two
systems together to connect the Siebel suite to
the mainframe.
Time and money running data reconciliations.
Custom coding to pay for, too. Source:
Computerworld Inc. Dec 3, 2001
And Fall
Surveys show 55 per cent of North
American executives don't believe
they've seen a return on their CRM
investments.
Gartner Group
Major Players:
Siebel Systems
26%
Oracle and
Broadvision
6% share

Despite the troubles CRM
software sales are expected
to rise 10% to $4 billion in
2002 and to rise 33% to $29.4
billion in 2003
12
Road Map
CRM= Customer + Relationship + Management
The Rise and Fall of CRM
Strategic Framework for CRM
Why CRM Fails
Lock-in vs. Loyalty
The Dark Side of Market Focus
Targets Market Focused Strategy and the
Challenges of Implementation
Conclusion
13
Customer Management Loop
Respond
Identify
Dialogue
Interpret
1. Decide what you will do with the information. Make it a part of your overall customer plan.
2. Establish customers as the information pivot in your organization. Gather the right Customer
Information (Who what when where and WHY) from the right customers through the right means
(not the most expensive).
3. Make this information useable, available and actionable throughout the organization where it is
needed.
4. Add context to the information. Interact with customers and understand their needs.
14
Case Study: Harrahs
Created a Total Rewards program to track players at
electronic gaming machines. These machines account
for 80% of operating profits
Links 40,000 machines in 12 states
The goal is to create brand loyal customers
Comps
(comps) good
toward shows,
meals or hotel
rooms.
Identify
15
Customers Are Not Created Equal
F
r
e
q
u
e
n
c
y
:

N
u
m
b
e
r

o
f

C
u
s
t
o
m
e
r
s

a
t

E
a
c
h

V
a
l
u
e

L
e
v
e
l

Value Per Customer
Mean
Standard Deviation
Why are they
unprofitable?
Can behavior or
cost be changed?
Should we
disengage?
Unprofitable
Modestly
profitable
or break
even
Modestly
profitable
What can be done to
develop the profitability
of these customers?
Who are these
customers? How do
we keep them, attract
more like them?
Very
profitable
Identify
16
Tufts Plan
As the pie shrinks
the table manners
get worse.
A prominent physician on
the current state of
physician satisfaction
.01% = $7,880
PMPM
5% = $1,191 PMPM
95% = $22 Per
Member Per Month
(PMPM)
The Problem
Information Solution - CRM
Patient Identification and Treatment Recommendation
Workflow Standardization
Multi-disciplinary Collaboration
Alerts care managers enables them to intervene early
Persistently reminds and motivates patients, families and
providers to comply with proven health management care
plans

Results from
similar programs:
44% reduction in
readmission
36% reduction in
hospital days for
patients with
congestive heart
failure
400% ROI for
pediatric asthma
program
12% annual cost
savings for diabetes
management
Identify
17
Pharmaceutical
Health Care
Physicians
Patients
Insurance/Gov.
Pharmacies
Defining your customers
Identify
18
Tribunes Customers
The Reader
The Advertiser
The Brick Wall
The Division Between Church and State
20% of Revenues 80% of Revenues
Identify
19
General Electric Medical Systems
Customers
Hospital
Purchasing
Department
The Lab
Technicians
Doctors































Hospital
Administration
Patients
Identify
20
Guidants Customers
Electro-
Physiologists
Implanting
Cardiologists
Cardiologists
Primary Care
Physicians
Patients
Primary
Relationship
Secondary
Relationships
Referral Chain
Identify
21
Customer Management Loop
Respond
Identify
Dialogue
Interpret
1. Decide what you will do with the information. Make it a part of your overall customer plan.
2. Establish customers as the information pivot in your organization. Gather the right Customer
Information (Who what when where and WHY) from the right customers through the right means
(not the most expensive).
3. Make this information useable, available and actionable throughout the organization where it is
needed.
4. Add context to the information. Interact with customers and understand their needs.
22
Using Customer Information to
Initiate Dialogue
Customized Web
Interface
Customer Service
and Support
Email
Pop-up ads
Sales Force Calls
Bulk Mailers
Broadcast ads
Internet
Physical
Push
Pull
Dialogue
23
Response Rates For
Marketing Communications
Differential Marketing
6-15% range depending
on quality of marketing
lists/segments defined
Relationship (1:1) Mktg.
18-30% range when using
highly targeted, one-to-one
type marketing campaigns
Traditional Marketing
2-5% range for traditional
types of mass media type
campaigns
Informational Marketing
1-3% range for customer
passively collecting
information
Passive
Interactive
Company Initiated
(Outbound)
Customer Initiated
(Inbound)
Dialogue
24
Customer Management Loop
Respond
Identify
Dialogue
Interpret
1. Decide what you will do with the information. Make it a part of your overall customer plan.
2. Establish customers as the information pivot in your organization. Gather the right Customer
Information (Who what when where and WHY) from the right customers through the right means
(not the most expensive).
3. Make this information useable, available and actionable throughout the organization where it is
needed.
4. Add context to the information. Interact with customers and understand their needs.
25
The potential of segmentation has
vastly increased in the new world
In the old world, segmentation was mostly static using demo- and
socio-graphics, attitudes and customer value. In the new
world, segmentation is behavior based, real-time and dynamic



Is there no value in static segmentations anymore and does every
segmentation have to be real-time?

Is behavioral segmentation the means to all ends and how do you
integrate it with existing (mostly offline) segmentation
methods?

Can multiple segmentations methods be used simultaneously for
different value creation purposes?

Interpret
Segmentation of Customers
26
The Customer Pyramid
Platinum
Gold
Iron
Lead
Least
Profitable
Most
Profitable
Differentiate
Customers
Depending on the
Level of
Involvement
Source: the Customer Pyramid, Zeithaml, Rust, and Lemon. Cal. Management Review, Summer 2001
Interpret
Prediction to
Optimize
27
Customer Break Even Analysis
Cost to Serve
Price
High
Low
Low
High
Goal is to
move
Customers
from below
the line
above the
line or to
lower the
line
Interpret
Understanding Customers patterns
28
Customer Management Loop
Respond
Identify
Dialogue
Interpret
1. Decide what you will do with the information. Make it a part of your overall customer plan.
2. Establish customers as the information pivot in your organization. Gather the right Customer
Information (Who what when where and WHY) from the right customers through the right means
(not the most expensive).
3. Make this information useable, available and actionable throughout the organization where it is
needed.
4. Add context to the information. Interact with customers and understand their needs.
29
Target right
customers
Cross-
selling
Reduce
lapse rate
Attract
more effective
acquisition
Develop
More sales per
customer per
year
Retain
Increase
customer
lifetime
Source of
impact
Typical lever
Stages of
customer
relationship
lifecycle

Churn

Market capitalisation
($ bn)

Market cap./customer ($)

5.4%

7.0


3,721

1.4%

35.3


5,883
CRM Creates Value by Improving Attraction,
Development, and Retention of Customers
Average revenue per
customer per year ($)
Average assets per account
($)
130

21,000
170

102,000




Number of accounts
New accounts (Q4 1999)
Average acquisition costs ($)

E-trade


1,881,000
413,500

360
Charles
Schwab


6,000,000
390,000

200
Respond
30
Segmentation
Victorias Secret places all visitors on its slower
servers but once a customer places something in
the shopping cart they are switched to a faster
server.
Customer Patterns
Amazon monitors browsing and makes
suggestions. Customer who bought this book also
purchased a book by.
Businesses that use Differential
Treatment
Respond
31
Road Map
CRM= Customer + Relationship + Management
The Rise and Fall of CRM
Strategic Framework for CRM
Why CRM Fails
Lock-in vs. Loyalty
The Dark Side of Market Focus
Targets Market Focused Strategy and the
Challenges of Implementation
Conclusion
32
Organizational Barriers to Customer
Information
1. Information Flow

2. Channel Obstacles

3. Company Barriers to Entering the
Data

33
Why CRM Fails: Strategy & Organization
What CRM is:
A strategy
A cross functional and cross
divisional initiative
Difficult both costly and time
consuming

What CRM is not:
a technology
A software package
A marketing department
initiative
Easy

55% of CRM implementations dont produce results
(Gartner Group)
20% Damage long standing customer relationships
(Bain Report)
Implement a CRM without a strategy
Implement CRM before readying the organization
The perception that more is better
Staking not wooing customers
Source: Avoid the four perils of CRM by Rigby, Reichheld and Schefter. HBR, February 2002.
34
Road Map
CRM= Customer + Relationship + Management
The Rise and Fall of CRM
Strategic Framework for CRM
Why CRM Fails
Lock-in vs. Loyalty
The Dark Side of Market Focus
Targets Market Focused Strategy and the
Challenges of Implementation
Conclusion
35
10% beneficial change in
increases NPV by %
Targets Differentiation Strategy:
Loyalty
New customer acquisition cost
New customer conversion rate
New customer revenue change
Cost of repeat customer
Conversion
0.84
2.32
4.64
0.69
Repeat customer revenue change
Repeat customer conversion rate
Customer churn rate
Retention 5.78
9.49
6.65
Visitor acquisition cost
Visitor growth
Attraction 0.74
3.09
36
Source: Frederick Reichheld and W. Earl Sasser, Customer Retention: A New Star to Steer By, Working Paper, Bain & Company,
November 1999.
10
20
30
40
50
60
Auto Service
Chain
Business
Banking
Credit
Card
Credit
Insurance
Insurance
Brokerage
Industrial
Distrib.
Industrial
Laundry
Office
Building
Management
Software
P
e
r
c
e
n
t

I
n
c
r
e
a
s
e

i
n

P
r
o
f
i
t

28%
35%
125%
25%
50%
45%
55%
40%
35%
And Profits
Profit Impact of 5% Increase in Retention
37
Loyalty
Loyalty has been hijacked and
tortured by opportunistic
marketeers. Your search will
reveal more than 100,000
(1,620,000 actual) loyalty related
pages overwhelmingly dominated
by loyalty cards, loyalty marketing,
loyalty programs, and my personal
favorite loyalty schemes. It seems
that loyalty has been reduced to a
potpourri of marketing gimmicks
designed to manipulate customer
behavior with cheap bribes.
Frederich Reichheld,
Loyalty Rules!
Loyalty obviously demands
superior profits, but it demands
more. It requires that those
profits be earned through the
success of partners, not at
their expense. Loyalty can be
earned only when leaders put
the welfare of their customers
and their partners ahead of
their own self-serving interests.
Isnt
Is
Data = Satisfaction = Loyalty
38
Lock-in vs. Loyalty
Truly Loyal Accessible
Locked-in High Risk
Attitude
Behavior
Positive Negative
High
Low
Source: Stakeholder Power, 2001 Steven Walker and Jeffrey W. Marr Perseus Publishing
Purchase Dont Purchase
Enjoy
Despise
39
Loyalty Programs
American Stores
Neiman Marcus
J.C. Penney
Toys R Us
Office Max
Staples
Kohls
Target
Saks
Sears
CVS
Citgo
Rite Aid
Daytons
Nordstrom
Federated
Medicine Shoppe
Amoco Conoco Exxon Phillips Shell Ultramar A&P Albertsons
TJX
Kroger
Zellers
Talbots
Safeway
Value City
Food Lion
Foot Locker
Victorias Secret
Source: The Price of Loyalty by James Cigliano, Margaret Georgiadis, Darren Pleasance, and Susan Whalley. The McKinsey Quarterly 2000 number 4.

US Retailers
with Loyalty
Programs
Costs: $1.2 Billion tied up in
annual customer discounts
Entitlement: The programs
are nearly impossible to
stop
Dont work: most customers
are looking for an alternative
Non-value Reward: If
customer spends $500 per
year most programs would
only give $5.
Most Programs Fail Because:

1 Dual Purpose programs. (Targets Take
Charge of Education donates 1% of Purchases)
2 Built to provide customer
information. (Grocery Stores use to obtain information)
3 Align the Organization!!
Successful programs are:
40
Road Map
CRM= Customer + Relationship + Management
The Rise and Fall of CRM
Strategic Framework for CRM
Why CRM Fails
Lock-in vs. Loyalty
The Dark Side of Market Focus
Targets Market Focused Strategy and the
Challenges of Implementation
Conclusion
41
The Perils of Market Focus
Listen to the wrong
customers:
Too many
messages:
everyone is
approaching
customers
with
relationship
Companies
offer intimacy
but are not
able to
reciprocate
with custom
offerings
Focus on
too small
of a group
while
alienating
many
customers
1
2
3
4
Data = Satisfaction = Loyalty = Payback
Customers actually
miss the days when
a transaction was
just a transaction,
when purchasing a
bar of soap didnt
mean entering into a
lifetime value
relationship.

The Hotel
asks me for
detailed
information
every time I
check in.
The rental car
shuttle made
me walk
because I
wasnt club
member. But I
was a loyal
customer
Sony Walkman
and Chrysler
Minivan were
both products
that customers
in focus groups
said they did
not want.
Source: Torment Your Customers (theyll love it) by Stephen Brown. Harvard Business Review, October 2001. And Preventing the Premature Death of Relationship
Marketing by Susan Fournier, Susan Dobscha and David Glen Mick. HRB Jan-Feb1998.
42
Examples
Sure they can call me at dinner, but I cant reach
them on the phone. They can send me 100 pieces
of mail per year, but I cant register one meaningful
response with them. Companies claim that theyre
interested in the customer. But the focus is on the
company
From Preventing the Premature Death
of Relationship Marketing Fournier,
Dobscha, and Mick, HBR 1997.
43
Build to Order
Build to Replenish
Build to Forecast
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1992 1994 1997 1999
From Dealer
Stock
Via Dealer
Out of
Distribution
Centers
Build to Order
McKinsey estimates
that in auto
manufacturing alone
BTO could save $80
Billion a year in
reduced excesses
stock
Why the Clamor?
Sales of mass market cars in Britain
While BTO has
eluded many firms,
others have made
significant progress
by using
ChoiceBoards.
The Myth of Mass Customization
DELLs ChoiceBoard Options
Source: A long march The Economist, July 14, 2001
44
Chaos
Conflict
Coordination Failure
Ownership and Accountability
From Matrix to Cubic Organization
CEO
North America Europe Asia
Production
Service
Sales
Marketing
Geography
2X 3X
1
2
3
1
2
Matrix
2
45
Road Map
CRM= Customer + Relationship + Management
The Rise and Fall of CRM
Strategic Framework for CRM
Why CRM Fails
Lock-in vs. Loyalty
The Dark Side of Market Focus
Targets Market Focused Strategy and the
Challenges of Implementation
Conclusion
46
The Duality of Market Driven
Organizations
Accountability
Coordination
Decentralized
Centralized
Product Focused Market Focused
Vs.
Vs.
Vs.
47
Internal Challenges - Information
Wall Street doesnt care how much product
we sell to a particular customer.
A Corporate Executive
Getting the information from the business silos and
combining it to see all interaction with a customer
Coordinating
Mechanism
Unified View of
the Customer
Aggregate the
information
Business
Silos
We had 86 internal
accounts for IBM
We aggregated
all IBM
information
One view of the
big picture of IBM
48
Challenges - Coordination
Give and Take
A B C
A
B
C
Product Silos
Solution
Clients dont care if a certain business line is losing money.
They view the account in its entirety. Clients want
accountability. They want you to run the relationship as
business not a product
Account Manager
49
External Challenges
New Sales Methods Alignment
Economics Mega Aggregators
Channel Conflicts
50
Information Can Be Consolidated at a
Any Level
No Segments
The Organization
Level
Some Segments
Various Types of
Customers
1-2-1 Direct
The Individual
Customer
Customer Segmentation Continuum
Average
Customer the
Soccer Mom
Club Wed
Lullaby Club
Target.direct
51
Targets Vendor Club

6 Premium Charter
Memberships
Exclusive opportunity to partner
Guest centric analytics
Targeted offers
Target Visa - electronic offers and
marketing support
Club Red exclusive offers
Now September 2003
$1.5 Million
10 Charter
Memberships
Target Visa electronic offers and
marketing support
Club Red exclusive offers
Now September 2003
$750,000 Million
Vendors input $16.5 million
Target will offer:
52
Other Benefits of the Vendor Club
Build a Competitive Advantage
18 month limited access
Guest Data Base
Analytics Suite
Focused Attention
New Channels
Vendor Opportunities
1. Offer a $ or % off one
or more items bought
in a single
transaction
2. Offer $ or % off one
or more items bought
in multiple
transactions
3. Offer free item with
single or multi
purchase
Access to Guest Specific Data
Whos Buying What
Who Are Your Key Segments
Market Basket Analysis
Geographic Profile
53
Case Study: The Problem of Complexity-
Who Owns Customer Loyalty?
Median Age (female) in 2001
Median Income

% College Graduate +
% Professional/ Managerial
% with Children <18 at Home
Target Wal-mart Kmart
44 46 47
$51 $44 $42
40
38
41
32 29
31 29
38 35
Guest
Location: The Store Managers own this Dimension
MULTIBRAND Target, Mervyns, Marshall Fields
Item The Merchants
Own the Item
Dimension
MULTICHANNEL-
Store, Web, Mail
Transaction Need to introduce the guest
dimension without losing the
Item and Location
dimension
54
The Role of The Chief Guest Officer
Chief Guest Officer
Vendors
Information
Merchants
Store
Managers
Other relationships are much more difficult
55
Trade Offs
High
Low
Independent
Integrated
56
Road Map
CRM= Customer + Relationship + Management
The Rise and Fall of CRM
Strategic Framework for CRM
Why CRM Fails
Lock-in vs. Loyalty
The Dark Side of Market Focus
Targets Market Focused Strategy and the
Challenges of Implementation
Conclusion
57
Differentiation Advantages
Differentiation allows a firm to command a premium price for its product or
service.

Competitive advantage is realized if the value of the price premium is greater than
the cost of differentiation.

Differentiation strategies require a deeper understanding of the customers needs
(customer value chain) than cost-based strategies. This typically requires an
in-depth customer segmentation analysis.

Differentiation strategies often require a different firm value chain with
appropriate linkages between the value chain of the firm and that of the
customer (e.g., Dell provides desired customization for each customer).

Differentiation may be more sustainable than cost leadership because it is build
on features that are harder to imitate.
58
CRM and Loyalty
Respond
Identify
Dialogue
Interpret
Truly Loyal Accessible
Locked-in High Risk
Attitude
Behavior
Positive Negative
High
Low
Purchase Dont Purchase
Enjoy
Despise
59
Challenges
Accountability
Coordination
Decentralized Centralized
Product Focused Market Focused
Vs.
Vs.
Vs.
New Sales Methods Alignment
Economics Mega Aggregators
Channel Conflicts
Internal
External
60
Examples
61
CRM Best Practice: Williams - Sonoma
Source: Adapted from 2000 Annual Statement
Seek to own the home through multi-channel retailing
Become the single most dominant force in
home furnishings by selling great products in
stores, through catalogs, and on the Internet.
Williams-Sonoms delivers on this vision
through powerful brands, consumer
satisfaction, channel synergy, vertical
integration, and operating efficiency.
Williams-Sonoma knows their consumers, and understands how the
marketing they do impacts their behavior. For example, they know
that mailing a new catalog boosts traffic in the retail stores. The
stores in turn provide consumer data that is leveraged by the
catalog, Internet, and merchandising groups to deliver better
solutions to consumers.
62
CRM Best Practice: Ford
Source: Accenture Consulting
The company began by building a data warehouse to provide a single, integrated
view of each consumer.
The second step was analyzing the consolidated data to achieve superior
consumer understanding as a basis for one-to-one marketing. The result:
unprecedented ability to understand consumers and differentiate and target
marketing messages.
The third step was leveraging the results of data analysis to create highly targeted
marketing campaigns. They also developed metrics to gauge campaign
effectiveness, as well as procedures to ensure that all data collected in campaigns
are captured by the company's data warehouse for continual enrichment of
consumer profiles.
The company now has a rich,
constantly expanding data source for
predicting consumers' long-term value
and developing appropriate, targeted
campaigns for every stage of its
relationship with a consumer.
1
2
3
63
CRM Best Practice: DuPont Agricultural
Products
DuPont project team that began by interviewing employees to gain
insight into their needs for serving consumers and to help them
understand the multi-level consumer base resulting from DuPont's
acquisition of Pioneer. Then the team designed and built a data
warehouse, seeing it as the strongest solution for gaining consumer
insight and the best basis for building consumer offers.
The data warehouse consolidated and cleaned existing consumer
information from all sources and was equipped to capture new data from
transactions and to permit updates.
The next step: leveraging the warehouse with TruChoice, a marketing
application with built-in incentives for farmers to encourage purchases
and for dealers to encourage data sharing.
TruChoice launched at the end of 1999, and results have been
outstanding. DuPont expects sales growth in their corn and soybean
operations; dealers and distributors have overcome their distrust and
begun providing consumer data; and farmers are so sold on TruChoice
that in areas in which it's not offered they're demanding dealers make it
available.
Source: Accenture Consulting