1. Differentiation AdvantageDifferentiation Advantage
• The nature of differentiation
• Differentiation and segmentation
• Analyzing differentiation: the demand side
• Analyzing differentiation: the supply side
• Bringing it all together: value chain analysis
OUTLIN
E

2. The Nature of DifferentiationThe Nature of Differentiation
TOTAL CUSTOMER RESPONSIVENESS
Differentiation not just about the product, it embraces the whole
relationship between the supplier and the customer.
INTANGIBLE
DIFFERENTATION
Unobservable and subjective
characteristics that appeal to
customer’s image, status,
identity, and desire for exclusivity
TANGIBLE DIFFERENTATION
Observable product characteristics:
• size, color, materials, etc.
• performance
• packaging
• complementary services
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

3. Differentiation and SegmentationDifferentiation and Segmentation
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: 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)

4. Differentiation and the Product Life CycleDifferentiation and the Product Life Cycle
New packages of hardware
and software introduced
SYSTEMAugmentation:
repackaging of
hardware and
software
PRODUCTS &
SERVICES
Decommoditization
COMMODITY
PRODUCTS &
SERVICES
Commoditization
Desystematization
: some packages
unbundled

5. Analyzing the Demand SideAnalyzing the Demand Side
Techniques for analyzing product attributes and
positioning:
• Multidimensional Scaling
• Conjoint Analysis
• Hedonic Price Analysis

6. Differentiation in Pain Relievers:
Multidimensional Scaling of Competing
Products in the U.S.
Differentiation in Pain Relievers:
Multidimensional Scaling of Competing
Products in the U.S.
High
Low
Low High
EFFECTIVENESS
GENTLENESS
Tylenol
Bufferin
Excedrin
Bayer
Anacin
Private
label
aspirin

7. Identifying Differentiation Potential:
The Demand Side
Identifying Differentiation Potential:
The Demand Side
THE PRODUCT
THE
CUSTOMER
What needs
does it satisfy?
By what
criteria do
they choose?
What
motivates
them?
What are key
attributes?
Relate patterns of
customer
preferences to
product attributes
What price
premiums do
product attributes
command?
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

8. SYSTEM PRODUCT
SERVICE COMMODITY
SUPPORT
(SOFTWARE)
Differentiated Undifferentiated
Differentiated
MERCHANDISE
(HARDWARE)
Undifferentiated
Differentiation of Hardware and SoftwareDifferentiation of Hardware and Software

9. Consistency of Differentiation Strategy:
Product Integrity
Consistency of Differentiation Strategy:
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.

10. Producer’s strategies
High quality Low quality
High 7 10
Consumer’s price 7 -5
strategies
Low -5 3
price 10 3
Note: In each cell, the lower left number is the payoff
to the consumer and the upper right number is
the payoff to the producer.
The problem of experience goods : quality can only be
ascertained after purchase. Hence: Prisoner’s Dilemma:-
Equilibrium reached with consumer paying a low price for a low quality item.
If producer can signal quality--- both consumer and producer can move to
preferred position: high quality product carrying a high price
Problem of Quality in Experience Goods:
A “Prisoner’s Dilemma”
Problem of Quality in Experience Goods:
A “Prisoner’s Dilemma”

11. The Impact of Quality on ProfitabilityThe Impact of Quality on Profitability
Low 25% 60% High
Relative market share
Relativeproductquality
Low33%67%High
Relativeproductquality
Low33%67%High
Relativeproductquality
Low33%67%High
Low 25% 60% High
Relative market share
Low 25% 60% High
Relative market share
ROI (%) Relative Price Relative Direct Cost
Conclusion: Increases in quality typically add more to price than they do
to cost.
19 28 38 107 107 108 104 103 101
14 20 28 103 104 104 104 102 100
7 16 23 101 101 102 104 102 100

12. Using the Value Chain to Identify
Differentiation Potential on the Supply Side
Using the Value Chain to Identify
Differentiation Potential on the Supply Side
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
INBOUND OPERATIONS OUTBOUND MARKETING SERVICE
LOGISTICS LOGISTICS & SALES
MIS that supports
fast response
capabilities
Training to support
customer service
excellence
Unique product features.
Fast new product
development
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

13. Identifying Differentiation Opportunities through
Linking the Value Chains of the Firm and its
Customers: Can Manufacture
Identifying Differentiation Opportunities through
Linking the Value Chains of the Firm and its
Customers: Can Manufacture
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.
Suppliesofsteel
&aluminum
Service&
technicalsupport
Sales
Distribution
Inventoryholding
Manufacturing
Design
Engineering
Inventoryholding
Purchasing
Distribution
Marketing
Canning
Processing
Inventoryholding
Purchasing
CANNERCAN MAKER
1
2 4
5
3