Differentiation Strategy

Differentiation Strategy
An integrated set of actions designed by a firm to produce
or deliver goods or services (at an acceptable cost) that
customers perceive as being different in ways that are
important to them
– price for product can exceed what the firm’s target customers
are willing to pay
– nonstandardized products
– customers value differentiated features more than they value low
cost

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Differentiation Strategy
 Value provided by unique features and value
characteristics
 Command premium price
 High customer service
 Superior quality
 Prestige or exclusivity
 Rapid innovation

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Differentiation Strategy
Differentiation actions required by this strategy:
– developing new systems and processes
– shaping perceptions through advertising
– quality focus
– capability in R&D
– maximize human resource contributions through low
turnover and high motivation

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 How to Obtain a Differentiation
Advantage
Control if Reconfigure to
needed maximize

Cost Drivers Value Chain

• Lower buyers’ costs

• Raise performance of product or service
• Create sustainability through:
customer perceptions of uniqueness
customer reluctance to switch to non-unique product
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Factors That Drive Differentiation
 Unique product features
 Unique product performance
 Exceptional services
 New technologies
 Quality of inputs
 Exceptional skill or experience
 Detailed information

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 Differentiation Strategy and the
Five Forces of Competition
R
a
re Pro
t o f uc t
d
s Co ival
mp ry
eti Am
Rivalry Among Competing
h ng on
T te
ub
s ti t
u Fi g
rm
s
Firms
S
Can defend against

r
of B g Powe
Five Forces of competition because:
Thr trants

s
En
ea t o

uy e r
Competition brand loyalty to

a i nin

f Ne

Ba rg
differentiated product
w

Bargaining Power
of Suppliers offsets price competition

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 Differentiation Strategy and the
Five Forces of Competition
R
a
re Pro
t o f uc t
d
s Co ival
mp ry
eti Am
Bargaining Power of Buyers
h ng on
T te
s ti t
u Fi g
rm Can mitigate buyer power
ub s
S
because:

r
well differentiated products

of B g Powe
Five Forces of 
Thr trants

s
En
ea t o

uy e r
Competition reduce customer sensitivity to

a i nin
f Ne

price increases
Ba rg
w

Bargaining Power
of Suppliers

8
 Differentiation Strategy and the
Five Forces of Competition
R
a
re Pro
t o f uc t
d
s Co ival
mp ry
eti Am
Bargaining Power of
h ng on
T te
ub
s ti t
u Fi g
rm
s
Suppliers
S
Can mitigate suppliers’ power

r
of B g Powe
Five Forces of by:
Thr trants

s
En
ea t o

uy e r
Competition absorbing price increases

a i nin

f Ne

Ba rg
due to higher margins
w

Bargaining Power
of Suppliers

passing along higher
supplier prices because
buyers are loyal to
differentiated brand
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 Differentiation Strategy and the
Five Forces of Competition
R
a
re Pro
t o f uc t
d
s Co ival
mp ry
eti Am
Threat of New Entrants
h ng on
T te
s ti t
u Fi g
rm Can defend against new
ub s
S
entrants because:

r
new products must surpass

of B g Powe
Five Forces of 
Thr trants

s
En
ea t o

uy e r
Competition proven products or,

a i nin
f Ne

new products must be at

Ba rg

w

Bargaining Power
of Suppliers least equal to performance
of proven products, but
offered at lower prices

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 Differentiation Strategy and the
Five Forces of Competition
R
a
re Pro
t o f uc t
d
s Co ival
mp ry
eti Am
Threat of Substitute
h ng on
T te
ub
s ti t
u Fi g
rm
s
Products
S
Well positioned relative to

r
of B g Powe
Five Forces of substitutes because:
Thr trants

s
En
ea t o

uy e r
Competition brand loyalty to a

a i nin

f Ne

Ba rg
differentiated product tends
w

Bargaining Power
of Suppliers to reduce customers’ testing
of new products or
switching brands

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 Major Risks of Differentiation
Strategy
 Customers may decide that the price differential between
the differentiated product and the cost leader’s product is
too large
 Means of differentiation may cease to provide value for
which customers are willing to pay

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 Major Risks of Differentiation
Strategy
 Experience may narrow customer’s perceptions of the
value of differentiated features of the firm’s products
 Makers of counterfeit goods may attempt to replicate
differentiated features of the firm’s products

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 Focused Business-Level
Strategies
A focus strategy must exploit a narrow target’s
differences from the balance of the industry by:
– isolating a particular buyer group
– isolating a unique segment of a product line
– concentrating on a particular geographic market
– finding their “niche”

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 Factors That May Drive Focused
Strategies
 Large firms may overlook small niches
 Firm may lack resources to compete in the broader
market
 May be able to serve a narrow market segment more
effectively than can larger industry-wide competitors
 Focus may allow the firm to direct resources to certain
value chain activities to build competitive advantage

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 Major Risks of Focused Strategies
 Firm may be “outfocused” by competitors
 Large competitor may set its sights on your niche market
 Preferences of niche market may change to match those
of broad market

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 Advantages of Integrated Strategy
A firm that successfully uses an integrated cost
leadership/differentiation strategy should be in a better
position to:
– adapt quickly to environmental changes
– learn new skills and technologies more quickly
– effectively leverage its core competencies while
competing against its rivals

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 Benefits of Integrated Strategy
 Successful firms using this strategy have above-average
returns
 Firm offers two types of values to customers
– some differentiated features (but less than a true
differentiated firm)
– relatively low cost (but now as low as the cost leader’s
price)

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 Major Risks of Integrated Strategy
 An integrated cost/differentiation business level strategy
often involves compromises (neither the lowest cost nor
the most differentiated firm)
 The firm may become “stuck in the middle” lacking the
strong commitment and expertise that accompanies firms
following either a cost leadership or a differentiated
strategy

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Customer Demand Profile
Value Map
 Seeking a better way
• Even the “experts” make huge mistakes.

• Almost always it relates to not understanding the customers.

• Today I want to make you experts on a the means-end

philosophy, and how to use it for practical problems.
 Means-End Chain Models
…that allow me to
…that perform …and helps me
The product has achieve (or avoid)
desired tasks to satisfy my
specific features desired psychological or
via consumption personal goals
sociological outcomes

Product Person

Functional Practical Emotional

Features
Benefits Benefits Payoffs

OR

Attributes Consequences Values

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 Let’s talk about meat
• People introducing plant-based meat-substitutes interviewed
people on why they wanted an alternative to meat.
• Lets look at two of the reasons people expressed for wanting
to avoid beef.

• What should the meat-substitute entrepreneurs be concerned

about?
 Avoidance Motives for Beef
Unhealthy
Lack of Self-
Respect

Clogged Arteries Unattractive

Weight Gain

Cholesterol

Fat content

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In many cases, you can imagine the Means-End chain
• 1) Think about a particular customer profile.
• 2) Imagine what they would say.
• 3) Repeat this for several different customer profiles.
• 4) Often people have multiple ways they connect with the
product.
 Sneaker Decision Themes
• In terms of Means-End Chains, try to write
out the reason why they want the most
expensive sneaker.

Most One or more Personal emotional payoffs

Expensive Consequences and personal values achieved

Write this on the same paper

you wrote on earlier.
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 Let’s look at an example on a familiar product
• Something we use everyday, TIRES!
• We take it for granted, but the right strategy brings great
profits.
Consumer Motivation:
Tire Choice
Family Peace of mind

Self
Feel safe
Knowledge

Drive with confidence

Avoid accidents

Better grip / traction Product

Knowledge

Tread design Rubber compound

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Project
• Choose your favorite fast food restaurant
• Speak with your group and decide the right differentiation strategy for
them. Tell us why that strategy is best.
• Describe the differentiation strategy using a means-end chain as
shown in the slide about tires.