Product Life Cycle- Differentiation Advantage

8/3/2019 Product Life Cycle- Differentiation Advantage

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Page 1

Product Lifecycle

Differentiation Advantage

Prof. Rushen Chahal



Page 2

Differentiation 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

OUTLINE



Page 3

The Nature of Differentiation

TOTAL CUSTOMER RESPONSIVENESSDifferentiation 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: ³P roviding 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!



Page 4

Differentiation and Segmentation

DOES DIFFERENTIATION IMPLY SEGMENTATION?

²Not 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)

SEG

MENT

ATI

ON

: is concerned with

wh

ich

customers,

needs,

localities a firm targets (i.e. Where the firm competes)





Page 6

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)



Page 7

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



Page 8

V ALUE CURVE for U.S.

WINE INDUSTRY ± YELLOWTAIL

Ex pensive

winesYellow tailCheap wines

Price

Use of technical

wine terminology

Above-the-line

marketing

Aging

quality

Vineyard

prestige

Wine

complexity

Wine

range

Easy

drinkability

Ease of

selection

Fun and

adventure

Low

High



Page 9

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 attributescommand?

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



Page 10

Supply Side: Product Integrity

Key to successful differentiation is consistency of allaspects of the firm¶s relationship with its customers.

P roduct Integrity : the total balance of product features

Internal integrity: consistency betweenfunction and structure

External integrity: fit between the product

and the customers¶objectives, values, lifestyleetc.

Examples?



Page 11

Signaling and Reputation

Akerlof: The market for lemons ± A form of prisoner¶s dilemma

± Especially problematic with ³experience´ and ³credence´goods (as opposed to ³search´ 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?



Page 12

The Impact of Quality on Profitability

Low 25% 60% High

Relative market share

R e l a t i v e p r o d u c t q u a l i t y

L o w

3 3 %

6 7 %

H i g h


L o w

3 3 %

6 7 %

H i g h


L o w

3 3 %

6 7 %

H i g h

Low 25% 60% High


Low 25% 60% High


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



Page 13

Using the Value Chain to Identify

Differentiation Potential on the Supply Side

FIRM INFRASTRUCTURE

HUM AN RESOURCE M ANAGEMENT

TECHNOLOGY DEVELOPMENT

INBOUND OPERATIONS OUTBOUND M ARKETING 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





Page 15

Industry Evolution

The industry life cycle

Industry structure, competition, and

success factors over the life cycle.

Anticipating and shaping the future.

OUTLIN

E



Page 16

The Industry Life Cycle

Drivers of industry evolution : demand growth

creation and diffusion of knowledge

emergence of a dominant design and commontechnical standards

Introduction Growth Maturity Decline

I n d u s t r y S a l e s

Time



Page 17

Product and Process Innovation Over Time

Time

R a

t e o f i n n o v a t i o n

Product Innovation

Process Innovation



Page 18

Standardization of Product Features in Cars

FEATURE INTRO DUCTION GENERAL ADO P TION

Speedometer 1901 by Oldsmobile Circa 1915

Automatic transmission 1st installed 1904 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

F

our-wh

eel drive Appeared 1924 Only limited availability by 1994Hydraulic 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 19

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 basicnecessities, e.g. food processing, construction, apparel)reach maturity, but not decline.

Industries may experience life cycle regeneration.

Sales Sales

1900 50 90 07 1930 50 70 90 07

MOTORC YCLES TV¶s

Life cycle model can help us to anticipate industryevolution²but dangerous to assume any common, pre-determined pattern of industry development

Life cycles may be shortening

Color B&W Portable

HDTV ?



Page 20

Evolution of Industry Structure over the Life Cycle

INTRO DUCTION GROWTH MATURITY DECLINE

DEMAN D Affluent buyers Increasing Mass market Knowledgeable, penetration replacement customers, resi-

demand dual segments

TECHNOLOGY Rapid product Product and Incremental Well-diffusedinnovation process innovation innovation technology

P RO DUCTS Wide variety, Standardization Commoditiz- Continuedrapid design change ation commoditization

MANUFACT- Short-runs, skill Capacity shortage, Deskilling OvercapacityURING intensive mass-production

TRADE -----Production shifts from advanced to developing countries-----

COM P ETITION Technology- Entry & exit Shakeout & Price wars,

consolidation exit

KSFs Product innovation Process techno- Cost efficiency Over head red-logy. Design. uction, ration-

alization, lowcost sourcing



Page 21

The Driving Forces of Industry Evolution

Customers become

more knowledgeable

& experienced

Diffusion of

technology

Demand growth

slows as market

saturation approaches

Customers become

more price conscious

Products become

more standardized

Distribution channels

consolidate

Production shifts

to low-wage

countries

Price competition

intensifies

Bargaining power

of distributors

increases

BASIC CONDITIONS INDUSTRYSTRUCTURE COMPETITION

Excess capacity

increases

Production

becomes less R&D

& skill-intensive

Quest for new

sources of

differentiation



Page 22

0

2

4

6

8

10

12

R O I

V a l u e

A d d e d / R e v e n u e

T e c h n i c a l

C h a n g e

N e w P r o d u c t s

% S a l e s f r o m

N e w P r o d u c t s

P r o d u c t

R & D / S a l e s

A g e o f P l a n t &

E q u i p .

I n

v e s t m e n t / S a l e s

A

d v e r t i s i n g / S a l e s

GrowthMaturityDecline

Note:

The figureshows

standardized means

for each variable for

businesses at each

stage of the life cycle.

Strategy and Performance across the Industry Life Cycle



Page 23

0

5

10

15

20

25

ROI (%)

Growth Maturity Decline

Real annualgrowth rate <3%

Real annualgrowth rate 3-6%

Real annualgrowth rate >6%

ROI at Different Stages of the Industry Life Cycle



Page 24

0

50

100

150

200

250

1895 1905 1915 1925 1935 1945 1955

No. of firms

Changes in the Population of Firms over the

Industry Life Cycle: US Auto Industry 1885-1961

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

³Organizational Ecology´



Page 25

1912 $ bn. 2006 $ bn.

US Steel 0.74 Exxon Mobil 372

Exxon 0.39 General Electric 363

J&P Coates 0.29 Microsoft 281

Pullman 0.20 Citigroup 239

Royal Dutch Shell 0.19 BP 233

Anaconda 0.18 Bank of America 212

General Electric 0.17 Royal Dutch Shell 211

Singer 0.17 Wal-Mart Stores 197

American Brands 0.17 Toyota Motor 197

Navistar 0.16 Gazprom 196

BAT 0.16 HSBC 190

De Beers 0.16 Procter & Gamble 190

The World¶s Biggest Companies, 1912 and 2006

(by market capitalization)



Page 26

Adaptation and Change

Sources of Inertia

± Routines: Core capabilities become core rigidities

± Social and political structures

± Conformity: institutional isomorphism and legitimacy-seeking

± Complementarities between strategy, structure, and

systems

Tendency for punctuated equilibrium ± Limited search and blinkered perceptions



Page 27

Preparing for the Future : The Role of Scenario

Analysis in Adapting toIndustry C

hange

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/ mostinteresting scenarios: configurations of changes andoutcomes

Consider implications of each scenario for the company

Identify key signposts pointing toward the emergence of each scenario

Prepare contingency plan



Page 28

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



Page 29

1880s 1920s 1960s 2000

Mail order ,

catalogue

retailing

e.g. Sears

Roebuck

Chain

Stores

e.g. A&P

Discount

Stores

e.g. K-MartWal-Mart

³Category

Killers´e.g. Toys-R-Us,

Home Depot

Internet

Retailers

e.g. Amazon;

Expedia

Warehouse

Clubs

e.g. Price Club

Sam¶s Club

Innovation & Renewal over the

Industry Life Cycle: Retailing

?



Page 30

Gary Hamel: Shaking the Foundations

OLD BRICK NEW BRICK

Top management is responsible

for setting strategy

Everyone is responsible

for setting strategy

Getting better , getting faster

is the way to win

Rule-busting innovation

is the way to win

IT creates competitive advantage Unconventional business concepts

create competitive advantage

Being revolutionary is high risk More of the same is high risk

We can merge our way to

competitiveness

There¶s no correlation between

size and competitiveness

Innovation equals new products

and new technology

Innovation equals entirely new

business concepts

Strategy is the easy part,

Implementation the hard part

Strategy is the easy only if you¶re

content to be an imitator

Change starts at the top Change starts with activists

Our real problem is execution Our real problem is execution

Big companies can¶t innovate Big companies can become gray-haired

revolutionaries



Page 31

Case: Video Games

Which companies have been mostsuccessful in each generation? What werethe key success factors?

Are the key success factors changing for the next generation?

What strategy should your company

(M

icrosoft, Sony, Nintendo) pursue for thenext generation?

Documents

Product Life Cycle- Differentiation Advantage