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Differentiation Advantage
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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INTANGIBLE DIFFERENTATION
Unobservable and subjective characteristics that appeal to customers image, status, identity, and desire for exclusivity
FOCUSED DIFFERENTIATION
SYSTEM
Decommoditization
COMMODIT Y
Commoditization
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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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Low Bufferin Bayer Private label aspirin Anacin Excedrin Low GENTLENESS
High EFFECTIVENESS
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Low
Price Above-the-line marketing Aging quality Vineyard prestige Wine complexity Wine range Easy drinkability
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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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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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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ROI (%)
67% High
Relative Price
67% High
19 14
28 20 16
38 28 23
60% High
Low 33%
Low 25%
Low 33%
Low 25%
60% High
Conclusion: Increases in quality typically add more to price than they do to cost.
Low 33%
Low 25%
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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
INBOUND LOGISTICS
OPERATIONS
OUTBOUND LOGISTICS
SERVICE
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
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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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 Innovation
Rate of innovation
Process Innovation
Time
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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
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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DEMAND
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
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
Excess capacity increases Demand growth slows as market saturation approaches Bargaining power of distributors increases Page 21
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
Note: The figure shows standardized means for each variable for businesses at each stage of the life cycle.
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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
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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
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1880s
1920s
1960s
2000
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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
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