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Product Lifecycle

Differentiation Advantage

Prof. Rushen Chahal


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Differentiation Advantage
OUTLINE
The nature of differentiation Differentiation and segmentation Analyzing differentiation: the demand side Analyzing differentiation: the supply side Bringing it all together: value chain analysis
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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
Observable product characteristics: size, color, materials, etc. performance packaging complementary services

INTANGIBLE DIFFERENTATION
Unobservable and subjective characteristics that appeal to customers image, status, 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. Page 3

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) Appealing to what distinguishes different customer groups (MTV Harley-Davidson, Ralph Lauren)
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FOCUSED DIFFERENTIATION

Differentiation and the Product Life Cycle


New packages of hardware and software introduced

Augmentation: repackaging of hardware and software PRODUCTS & SERVICES

SYSTEM

Desystematization : some packages unbundled PRODUCTS & SERVICES

Decommoditization

COMMODIT Y

Commoditization

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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)

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Differentiation in Pain Relievers: Multidimensional Scaling of Competing Products in the U.S.


High Tylenol

Low Bufferin Bayer Private label aspirin Anacin Excedrin Low GENTLENESS

High EFFECTIVENESS

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


Expensive wines Yellow tail Cheap wines

Low
Price Above-the-line marketing Aging quality Vineyard prestige Wine complexity Wine range Easy drinkability

Ease of selection Fun and adventure Page 8

Use of technical wine terminology

Identifying Differentiation Potential: The Demand Side


THE PRODUCT What needs does it satisfy? What are key attributes? Relate patterns of customer preferences to product attributes What price premiums do product attributes command? What motivates them? 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 differentiation
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By what criteria do they choose? THE CUSTOMER

Supply Side: Product Integrity

Key to successful differentiation is consistency of all aspects of the firms 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?
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Signaling and Reputation Akerlof: The market for lemons


A form of prisoners 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?
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The Impact of Quality on Profitability

Relative product quality

Relative product quality

Relative product quality

ROI (%)
67% High

Relative Price
67% High

Relative Direct Cost


67% High

19 14

28 20 16

38 28 23
60% High

107 107 103 104 101 101

108 104 102

104 104 104

103 101 102 100 102 100


60% High

Low 33%

Low 25%

Low 33%

Low 25%

60% High

Relative market share

Relative market share

Conclusion: Increases in quality typically add more to price than they do to cost.

Low 33%

Low 25%

Relative market share

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Using the Value Chain to Identify Differentiation Potential on the Supply Side
MIS that supports fast response capabilities Training to support customer service excellence Unique product features. Fast new product development

FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT

INBOUND LOGISTICS

OPERATIONS

OUTBOUND LOGISTICS

MARKETING & SALES

SERVICE

Quality of components & materials

Defect free products. Wide variety

Fast delivery. Efficient order processing

Building brand reputation

Customer technical support. Consumer credit. Availability of spares Page 13

Identifying Differentiation Opportunities through Linking the Value Chains of the Firm and its Customers: Can Manufacture

1 2 Supplies of steel & aluminum Inventory holding Inventory holding Manufacturing 3 Service & technical support 4

5 Inventory holding

Distribution

Purchasing

Processing

Design Engineering

Distribution

Marketing

1. Distinctive can design can assist canners marketing activities.

2. High manufacturing tolerances can avoid breakdowns in customers 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 canners efficiency of plant utilization. Page 14

Purchasing

Canning

Sales

CAN MAKER

CANNER

Industry Evolution
OUTLIN E
The industry life cycle Industry structure, competition, and success factors over the life cycle. Anticipating and shaping the future.

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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
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Product and Process Innovation Over Time

Product Innovation

Rate of innovation

Process Innovation

Time
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Standardization of Product Features in Cars

FEATURE INTRODUCTION Speedometer 1901 by Oldsmobile Automatic transmission 1st installed 1904

GENERAL ADOPTION Circa 1915 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 Page 18

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 MOTORCYCLES

1930

50 70 TVs

90

07
HDTV ?

Life cycle model can help us to anticipate industry evolutionbut dangerous to assume any common, predetermined pattern of industry development Life cycles may be shortening
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Evolution of Industry Structure over the Life Cycle


INTRODUCTION Affluent buyers GROWTH Increasing penetration MATURITY Mass market replacement demand DECLINE Knowledgeable, customers, residual segments Well-diffused technology Continued commoditization Overcapacity

DEMAND

TECHNOLOGY PRODUCTS MANUFACTURING TRADE COMPETITION KSFs

Rapid product innovation

Product and Incremental process innovation innovation Commoditization Deskilling

Wide variety, Standardization rapid design change Short-runs, skill intensive Capacity shortage, mass-production

-----Production shifts from advanced to developing countries----TechnologyEntry & exit Process technology. Design. Shakeout & consolidation Cost efficiency Price wars, exit Overhead reduction, rationalization, low cost sourcing Page 20

Product innovation

The Driving Forces of Industry Evolution


BASIC CONDITIONS
Customers become more knowledgeable & experienced

INDUSTRY STRUCTURE

COMPETITION

Customers become more price conscious Quest for new sources of differentiation

Products become more standardized Diffusion of technology Production becomes less R&D & skill-intensive Production shifts to low-wage countries

Price competition intensifies

Excess capacity increases Demand growth slows as market saturation approaches Bargaining power of distributors increases Page 21

Distribution channels consolidate

Strategy and Performance across the Industry Life Cycle

12 10 8 6 4 2
Va lue Added/Revenue Adv ertising/Sales Pr oduct R&D/Sales ROI Investment/Sales New Products % Sale s from New Products Age of Plant & Equip. Technical Cha nge

Growth Maturity Decline

Note: The figure shows standardized means for each variable for businesses at each stage of the life cycle.

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ROI at Different Stages of the Industry Life Cycle

25 20 15 ROI (%) 10 5 0
Growth Maturity Decline Real annual growth rate <3% Real annual growth rate 3-6% Real annual growth rate >6%

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Changes in the Population of Firms over the Industry Life Cycle: US Auto Industry 1885-1961
Organizational Ecology
250 200 150 100 50 0
1895 1905 1915 1925 1935 1945 1955

No. of firms

Source: S. Klepper, Industrial & Corporate Change, August 2002, p. 654. Page 24

The Worlds Biggest Companies, 1912 and 2006


(by market capitalization)
1912 US Steel Exxon J&P Coates Pullman Royal Dutch Shell Anaconda General Electric Singer American Brands Navistar BAT De Beers $ bn. 0.74 0.39 0.29 0.20 0.19 0.18 0.17 0.17 0.17 0.16 0.16 0.16 2006 Exxon Mobil General Electric Microsoft Citigroup BP Bank of America Royal Dutch Shell Wal-Mart Stores Toyota Motor Gazprom HSBC Procter & Gamble $ bn. 372 363 281 239 233 212 211 197 197 196 190 190

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Adaptation and Change


Sources of Inertia
Routines: Core capabilities become core rigidities Social and political structures Conformity: institutional isomorphism and legitimacyseeking Complementarities between strategy, structure, and systems
Tendency for punctuated equilibrium

Limited search and blinkered perceptions

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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

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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

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Innovation & Renewal over the Industry Life Cycle: Retailing


Warehouse Internet Clubs Retailers e.g. Price Club e.g. Amazon; Sams Club Expedia Discount Category Stores Killers e.g. K-Mart e.g. Toys-R-Us, Wal-Mart Home Depot

Mail order, catalogue retailing e.g. Sears Roebuck

Chain Stores e.g. A&P

1880s

1920s

1960s

2000
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Gary Hamel: Shaking the Foundations


OLD BRICK
Top management is responsible for setting strategy Getting better, getting faster is the way to win IT creates competitive advantage Being revolutionary is high risk We can merge our way to competitiveness Innovation equals new products and new technology Strategy is the easy part, Implementation the hard part Change starts at the top Our real problem is execution Big companies cant innovate

NEW BRICK
Everyone is responsible for setting strategy Rule-busting innovation is the way to win Unconventional business concepts create competitive advantage More of the same is high risk Theres no correlation between size and competitiveness Innovation equals entirely new business concepts Strategy is the easy only if youre content to be an imitator Change starts with activists Our real problem is execution Big companies can become gray-haired revolutionaries Page 30

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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