INNOVATE OR DUPLICATE

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DIFFERENTIATION
INNOVATE OR DUPLICATE
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LET US LEARN FROM A REALTIME PROBLEM
DOOR-O-MATICS A LEADING COMPANY MANUFACTURING
STYLISED DOOR FITTINGS IN SELECT STATES OF USA
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• A LARGE COMPANY IN US MANUFACTURING SPECIALISED
  DOOR
• FITTINGS IN METAL WITH ANNUAL PRODUCTION CAPACITY
  OF
• 10 M PIECES PER ANNUM ARE EARNING AROUND 70
  PROFITS
• AT 50 CAPACITY UTILISATION WITH LARGE
  ASSORTMENTS AND
• AVAILABILITY OF THE PRODUCT THROUGH SELECT
  OUTLETS ONLY.
• NOW THE OPTIONS AVAILABLE ARE
• TO EXPAND THE DISTRIBUTION NETWORK AND TAKE A
  LARGE
• MARKET SHARE AND BETTER CAPACITY
  UTILISATION.
• TO SEARCH FOR A LARGE RETAILER TO PLACE THEIR
  PRODUCT
• AT AN INTERNATIONAL FRONT FOR BETTER
  VOLUMES.
• C. ANY OTHER IDEA

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• FINALLY THEY FIND A LARGE GLOBAL RETAIL CHAIN BUT
  THEY
• ASK FOR 25 PRICE REDUCTION BUT CONFIRM A VOLUME
  
• EQUIVALENT TO 70 OF THEIR EXISTIUNG CAPACITY.
• WHAT ARE THE PROS AND CONS INVOLVED ?

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SECOND YEAR THE SAME COMPANY ASK FOR ANOTHER
REDUCTION IN PRICES BY 15 20 BUT ARE DOUBLING
THE ORDER ? A. WHAT SHOULD THE COMPANY DOES ?
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• THE SUPPLIER EXPANDED HIS CAPACITY BUT IN THE
  THIRD YEAR
• THE RETAILER IS ASKING FOR ANOTHER REDUCTION IN
  THE PRICES
• WITH INCREASE IN ORDER
• WHAT SHOULD THE MANUFACTURER DO ?
• WHAT ARE THE LESSONS ?

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Differentiation is the Unique Element
      To be unique at something that is
valuable to buyers.
      Differentiation has close relation to
the Industry Structure.
      Pursuing forms of uniqueness which buyers
do not value, is not
differentiation.
      To sustain the differentiation once
achieved, is often difficult.
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What it does?
      Differentiation allows the firm to
command a premium price.
      It can sell more of its products at a
given price or can gain equivalent
benefits such as greater buyer loyalty
during cyclical or seasonal downturns.
      Differences in buyer needs within an
industry can lead to opportunities of
differentiation.
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Lancasters Stream of research in demand
theory A stream of research in demand theory
pioneered by Lancaster sees a product as bundle
of attributes that the buyer desires. This
theory shows - how valuable attributes grow out
of buyers value chain, how product attributes
actually create buyers value, and how valuable
attributes relate to the activities performed by
a firm .
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Some Bases for Differentiation
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Value Chain Activities Examples of
Differentiation
Firm Infra-structure
Superior MIS To integrate value-creating
activities to improve quality
Facilities that promote firm image
Widely respected CEO enhances firm reputation
Human Resource Management
Programs to attract talented engineers and
scientists
Provide training and incentives to ensure a
strong customer service orientation
Margin
Technology Development
Superior material handling and sorting technology
Excellent applications engineering support
Purchase of high quality components to enhance
product image
Use of most prestigious outlets
Procurement
Superior material handling operations to minimize
damage Quick trans-fer of inputs to
manufacturing process
Flexibility and speed in responding to changes in
manufacturing specifications Low defect rates to
improve quality
Accurate and responsive order processing Effective
product replenishment to reduce customers
inventory
Creative and innovative advertising
programs Fostering of personal relationship with
key customers
Rapid response to customers service requests
Complete inventory of replacement parts and
supplies
Margin
Inbound Logistics
Operations
Outbound Logistics
Marketing and Sales
Service
Source Adapted from Porter, M.E. 1985.
Competitive Advantage, New York Free Press.
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Differentiating factors resulting from broad
competitive scope(Tetra pak)
      Ability to serve buyer needs anywhere.
      Simplified maintenance for the buyer if
spare parts and design philosophies are
common for a wide line.
      Single point at which buyers can purchase
      Single point for Customer Service
      Superior compatibility among products.
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Carton Packaging
Important divisional issues

• Improve system performance Quality
  Efficiency Cost
• Improve package appearance

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Carton Packaging
Important divisional issues

• Achieve excellence in openings
• Improve productivity
• Define and evaluate product portfolio
• Drive standardisation
• Measure customer satisfaction

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Plastic Packaging
Important divisional issues

• Channel-to-market
• Trim product portfolio
• Focus on EBM and PET
• Rebalance development program

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Plastic Packaging
Important divisional issues

• Gain strength in closures
• Emphasis on aseptic systems
• Measure customer satisfaction

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Processing Systems
Important divisional issues

• Channel-to-market - separation v.
  integration
• Secure positive operating result
• Increase technical service sales volumes gt20

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Processing Systems
Important divisional issues

• Reduce costs, increase productivity
• Reduce operating capital towards 0
• Measure customer satisfaction

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Differentiation can also stem from downstream
activities
      Selective distribution through
well-chosen outlets and provision of
promotional material.
      Channel-selection which achieves
consistency in facilities, capabilities
or image

•       Establishing standards and policies for
  how
• channels must operate
• Providing funding so that the channels can
  offer
• effective credit schemes

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Differentiation and value chain elements -1
      The procurement of raw materials and other
inputs can affect the performance
of the end product and create
differentiation. (Heineken)
      Technology development activities can lead
to product design that create unique
product performance. ( Intel)
      Operation activities can affect such forms
of uniqueness as product appearance,
conformance to specifications and
reliability. (Toyota)
      The outbound logistical system can shape
the speed and consistency of deliveries
and thereby create differentiation.(Fe
dex)
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Differentiation and value chain elements -2
      The breadth of activities of service can
create differentiation. (Prudential)
  High Delivery Reliability can create
differentiation. (United Parcel Service)

• Exceptional Sales Marketing functions can
• create differentiation. (Sony)
• Indirect activities like maintenance or
  scheduling
• can contribute to differentiation.( Singapore
  Airlines)

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Main drivers of uniqueness
      Policy choices
      Linkages
      Timing
      Location
      Interrelationships
      Learning and spillovers
      Integration
      Scale
      Institutional factors
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Driver Policy Choices
      Product features and performance offered
      Services provided (credit, delivery, or
repair etc.)
      Intensity of an activity adopted (Rate of
ad spending)
      Content of activity (The information
provided in order processing)
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      Technology employed in performing and
activity ( precision of machine tools,
exceptional processes)
      Quality of inputs procured for an activity

•       Procedures governing the actions of
  personnel
• (Service procedures, nature of sales calls,
  frequency of
• inspection or sampling)
• Skill and experience level of personnel and
  training
• Information employed to control an activity(no of
  variables to control a chemical process)

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Drivers - Linkages
      Supplier Linkages Close coordination
with suppliers can shorten new model
development time.
      Channel Linkages Training channels in
selling and other business practices, Joint
selling efforts with channels, Subsidizing
for channel investments etc.Japanese have
dramatically lowered the defect rate drastically
by investing in activities creating defects
rather than in inspection procedures.
 

• Training channels in selling and other business
  practices
• Joint selling efforts with channels
• Subsidizing for channel investments in personnel,
  facilities and
• Performance of additional activities.

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Drivers - Timing
      Being the first to adopt a product-image
may make the firm unique. ( VCR,Walkman,
CD ,PC etc)
      Early Regulatory Approval for its soft
contact lenses gave Bausch and Lomb its
initial differentiation
      Moving late may allow to employ the most
modern technology and thereby give
differentiation
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BENJAMIN FRANKLIN MAY HAVE DISCOVERED
ELECTRICITY BUT IT WAS THE MAN WHO INVENTED
METER WHO MADE THE MONEY. ETEHERNET, GRAPHICAL
USER INTERFACE AND LASER PRINTER WERE INVENTED
BY NETSCAPE, APPLE AND HEWLETT PACKARD
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WRONG IT WAS XEROX FOR ALL THREE.
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Drivers - Location
      Uniqueness may stem from Location (CITI
bank in Delhi)
Drivers - Interrelationships
      Sharing value activity with sister
business may give uniqueness. (Insurance
and mutual funds)
      Sharing a sales force for Financial and
Insurance Business gave strong arms to
Chase Manhattan
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Drivers Learning and spillovers
      Uniqueness of an activity may be result of
learning about how to perform it better.
      Proprietary learning always leads to
sustainable differentiation.
Drivers Integration

• Integration leads to better control on
  performance of
• Various value activities.(Federal Bank-software)

• De-integration also becomes a differentiating
  factor in
• Some industries whereby exploiting channels
  resources
• help you Improve value chain.

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Comparing Experience Curve Effects
1
90
81
72.9
80
90 original cost
Cost per Unit
64
70
51.2
80 original cost
60
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34.3
70 original cost
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21.6
64 original cost
4 millionunits
0 units
1 millionunits
2 millionunits
Cumulative Volume
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Drivers - Scale
      Large scale can give uniqueness
      The relevant type of scale that leads to
differentiation may vary from business to
business.
      For Hertz it is the large number of
rental and service locations, whereas for
GM it is the scale of plant that allows
precise tolerances due to high speed equipments.
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Driver Institutional Factors
      Institutional factors play a role in
allowing a firm to be unique.
      Reliance has this benefit, which gives
them uniqueness in getting licenses in time.
      Victoria Secret had this benefit in
pushing their products due its proximity
with Health Sector
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Examination of drivers
      A firm must examine each of its areas of
uniqueness to see which driver is most
important.
      This examination is critical to
sustainability of differentiation because
some drivers may provide more
sustainability than others.
      The drivers of uniqueness may suggest new
sources of differentiation
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The cost of differentiation
      Differentiation is usually costly because
a firm often incurs costs to be unique and
uniqueness requires that it performs value
activities better than the competitors
E.g. superior application engineering support
usually requires additional engineers, highly
skilled sales force typically costs more than a
less skilled one, achieving greater product
durability would require more and better material
content etc.
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Relation with the cost drivers
             The cost of differentiation
reflects the cost drivers of the value
activities on which uniqueness is based.
             The relationship between
uniqueness and cost drivers take two
related forms
             Uniqueness drivers can impact cost
drivers
             The cost drivers can affect the
cost of being unique
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Buyers Value chain
      Uniqueness does not lead to
differentiation unless it is valuable to
the buyer.
      Hence it is important to create value for
buyers that yield a price premium in excess
of the extra cost.
      The starting point for understanding what
is valuable to the buyers, is to understand
Buyers Value Chain
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Buyer value and differentiation
      Buyers value chain is easier to
visualize in case of industrial,
commercial or institutional buyers.
      The individual buyers value chain is
often more complex because it represents the
sequence of activities performed by a
household and its various members in which
the product or service fits.
      To understand this, it is necessary to
identify those activities in which a
product is directly or indirectly involved.
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A firm creates value for a buyer that justifies
premium price through two mechanisms
      By lowering buyer cost The cost of
product includes not only financial cost
but also time and convenience cost. The cost of
time reflects the opportunity cost of
using it as well as implicit cost of frustration,
annoyance or exertion. (saving on
something/utility) (The refrigerator that
uses less electricity, a vacuum cleaner that
saves vacuuming time and exertion, etc.)

• By raising Buyer Performance
•       (TV with exceptional picture quality,
  less warm up time etc.
• The status play equal role as the product
  features play.)

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Various ways in which Buyers Cost is lowered
      Lower delivery, installation or financing
cost.
      Lower the required rate of usage of the
product. Amway
       
      Lower the direct cost of using the
product such as labor, fuel, maintenance and
required space. Honda
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      Lower the indirect cost of using the
product, or the impact of the product on other
value activities. (light component reducing
transport) Aluminum Engine
      Lower the buyer cost in other value
activities unconnected with the physical product
Consultancy services technical
      Lower the risk of product failure and
thus the buyers expected cost of failure Boeing
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Raising Buyer Performance
      Raising buyer performance will depend on
understanding what is desirable performance from
buyers point of view
      It can also be based on helping them meet
their non-economic goals such as, status, image,
prestige
      (Amex differentiates itself due to the
security of redemptions anywhere and rapid
replacements of lost checks.)
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Buyer perception of value
      Buyers often have a difficult time in
assessing the value provided by the firm in
advance
      Buyers will not pay for value which
they do not perceive, no matter how real it
is Hence the Price Premium a firm commands will
reflect both the value actually delivered and
the extent to which the buyers perceive the value
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Identification of Buyer Purchase criteria
      Use Criteria This includes such factors
as Product quality, Product features, Delivery
time, Applications engineers support etc.
      Signaling Criteria This is about signals
of value and means used by the buyer to infer or
judge these values e. g. advertising, the
attractiveness of facilities and reputation.
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Use Criteria
      There are many use criterion that go well
beyond characteristics of physical product or the
system by which a firm delivers and supports its
product even if the physical product is
undifferentiated.
      Use Criteria can include specifications
achieved by a firms product and also consistency
with which those specifications (Conformance) are
met.
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      Use Criteria can also include intangibles
such as style, brand connotation, particularly in
consumer goods.
      Intangible Use Criteria are most
important in Industrial, commercial or
institutional products where the real buyer is an
individual with considerable discretion in
purchasing.
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Signaling Criteria
      Reputation or image
      Cumulative advertising
      Weight or outward appearance of product
      Packaging and labels
      Appearance and size of facilities
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      Time in business
      Installed base
      Customer list
      Market share
      Price (Where price connotes quality)
      Parent company identity (Size, financial
stability etc.)
      Visibility to top management of the
buying firm  
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DIFFERENTIATION STRATEGIES IL OP OL SM SER
USE CRITERIA SIGNALLING CRITERIA
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ROUTES TO DIFFERENTIATION
INVEST IN UNDERSTANDING HOW THE PRODUCT IS
ACTUALLY USED BY BUYERS MODIFY THE PRODUCT TO
MAKE IT EASIER TO USE CORRECTLY DESIGN EFFECTIVE
MANUALS AND OTHER INSTRUCTIONS FOR USE , RATHER
THAN TREATING THEM AS AFTERTHOUGHT PROVIDE
TRAINING AND EDUCATION TO BUYERS TO
IMPROVE ACTUAL USE, EITHER DIRECTLY OR VIA
CHANNELS.
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MAKE THE COST OF DIFFERENTIATION AN
ADVANTAGE EXPLOIT ALL SOURCES OF
DIFFERENTIATION WHICH ARE NOT COSTLY MINIMISE
THE COST OF DIFFERENTIATION BY CONTROLLING COST
DRIVERS PARTICULARLY COST OF SIGNALLING EMPHASIZE
FORMS OF DIFFERENTIATION WHERE THE FIRM HAS A
SUSTAINABLE COST ADVANTAGE IN DIFFERENTIATING. RE
DUCE COST IN ACTIVITIES THAT DO NOT AFFECT
BUYER VALUE. (ORGANIC FARMING)
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CHANGE THE RULES TO CREATE UNIQUENESS DEPLOYING
A NEW KIND OF SALESPERSON INVOLVING TECHNICAL
PEOPLE IN SALE CHANGING ADVERTISING MEDIA AND
CONTENT CHANGING SELLING MATERIALS EDUCATING THE
BUYER ABOUT NEW BASES FOR THE DECISION THAT
REQUIRES A DIFFERENT DECISION MAKER DISCOVER
UNRECOGNIZED PURCHASE CRITERIA PREEMPTIVELY
RESPOND TO CHANGING BUYER OR CHANNEL
CIRCUMSTANCES. RECONFIGURING THE VALUE CHAIN
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PITFALLS IN DIFFERENTIATION UNIQUENESS THAT IS
NOT VALUABLE (CAR WITH A FOOT REST) TOO MUCH
DIFFERENTIATION ( CAR THAT FLIES) TOO BIG A
PRICE PREMIUM ( BOSE) IGNORING THE NEED TO
SIGNAL VALUE ( SUPPLIER OF POOR PRODUCT WITH
BETTER UNDERSTANDING OF BUYING PROCESS MAY TAKE
OVER)SKODA SUPERB V/S MERCEDES NOT KNOWING THE
COST OF DIFFERENTIATION (ORGANIC FARMING) FOCUS
ON THE PRODUCT INSTEAD OF VALUE CHAIN FAILURE TO
RECOGNIZE BUYERS SEGMENT
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• EIGHT STEPS TO DIFFERENTIATION
• DETERMINE WHO THE REAL BUYER IS
• IDENTIFY BUYERS VALUE CHAIN AND THE FIRMS
  IMPACT ON IT.
• DETERMINE RANKED BUYER PURCHASING CRITERIA.
• ASSESS THE EXISTING AND POTENTIAL SOURCES OF
  UNIQUENESS IN
• A FIRMS VALUE CHAIN.
• IDENTIFY THE COST OF EXISTING AND POTENTIAL
  SOURCES OF
• DIFFERENTIATION.
• CHOOSE THE CONFIGURATION OF VALUE ACTIVITIES THAT
  CREATES
• THE MOST VALUABLE DIFFERENTIATION FOR THE BUYER
  RELATIVE
• TO COST OF DIFFERENTIATING
• TEST THE CHOSEN DIFFERENTIATION STRTAGEY FOR
  SUSTAINABILITY.
• REDUCE COST IN ACTIVITIES THAT DO NOT AFFECT THE
  CHOSEN
• FORMS OF DIFFERNETIATION.

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Competitive Advantage and Business Performance
Competitive Advantage
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Competitive Advantage and Business Performance
Competitive Advantage
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Stages of the Industry Life Cycle