Sources of differentiation Advantage of the firm

A firm differentiates itself from its competitors when it provides something   unique  that  is valuable   to   buyers  beyond  simply   offering a low price. Differentiation allows the firm to command  a premium price, to sell more of its product at a given price, or to gain equivalent benefits such as greater buyer loyalty during cyclical or seasonal downturns.1 Differentiation leads to superior performance if the price premium achieved exceeds any added costs of being unique. A firm’s differentiation   may   appeal to   a broad  group  of buyers in an industry or only to a subset of buyers with particular  needs. Brooks Brothers appeals to buyers wanting  traditional  clothing, for example, though many buyers view Brooks Brothers clothing as too conservative. Differ­ entiation will be treated in general terms in this chapter, and Chapter 7 will describe how   differences   in   buyer  needs   within   an   industry can lead to opportunities for differentiation through focus.

1. Differentiation and the Value Chain

Differentiation cannot be understood by viewing the firm in aggre­ gate, but  stems from the specific activities a firm performs  and how they affect the buyer.2 Differentiation grows out  of the firm’s value chain. Virtually any value activity is a potential source of uniqueness.

The procurement of raw materials and other inputs can affect the performance of the end product and hence differentiation. For example, Heineken pays particular attention to the quality and purity of the ingredients for its beer and uses a constant strain of yeast. Similarly, Steinway uses skilled   technicians  to   choose  the   finest materials  for its pianos, and Michelin is more  selective than  its competitors  about the grades of rubber it uses in its tires.

Other successful differentiators create uniqueness through other primary and support activities. Technology development  activities can lead to product designs that have unique  product  performance,  as Cray Research has done in supercomputers. Operations activities can affect such forms of uniqueness as product appearance,  conformance to specifications, and   reliability.   Perdue,  for   example,   has   bolstered its differentiation of fresh chickens by careful control of growing condi­ tions and by feeding chickens marigolds to improve their color. The outbound logistical system can shape the speed and consistency of deliveries. For example, Federal Express has established an integrated logistical system using its Memphis hub that yields a level of delivery reliability unheard of prior to its entry into the small-parcel delivery business. Marketing and sales activities also frequently have an impact on differentiation. Timken’s  sales force,   for example,   assists its buyers to use roller bearings more effectively in their manufacturing processes. Figure 4 -1 illustrates how any activity in   the   value   chain   can potentially contribute  to   differentiation.   Even   if the   physical   product is a commodity, other activities can often lead to substantial differentia­ tion. Similarly, indirect  activities such as maintenance  or   scheduling can contribute to differentiation just as do direct activities such as assembly or order processing. For example, a dust and fume free build­ ing can dramatically improve defect rates in semiconductor manufac­ turing.

Value activities representing only a small percentage  of total cost can nevertheless have a m ajor impact on differentiation. For example, inspection may represent only 1 percent  of cost, but  shipping even one defective package of drugs to a buyer can have m ajor negative repercussions for a pharmaceutical  firm’s perceived differentiation. Value chains developed for purposes of strategic cost analysis, there­ fore, may not isolate all activities that are im portant for differentiation. Differentiation analysis requires a finer division of some value activities, while others may be aggregated if they have little differentiation impact. A firm may also differentiate itself through   the   breadth   of its activities, or its competitive scope. Crown Cork and Seal offers crowns (bottle caps) and filling machinery  plus cans. It thus  offers a full line of packaging services to its buyers, and its expertise in packaging machinery gives it more credibility and access in selling cans. Citicorp’s breadth of activities   in financial   services enhances  its reputation  as well as allowing its sales channels  to   offer a broader  product  range. A number of other differentiating factors can result from broad  com­ petitive scope:

  • 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 the buyer can purchase
  • single point for customer service
  • superior compatibility among products

Most of these benefits require consistency or coordination  among activ­ ities if a firm is to  achieve them.

Differentiation can also stem from downstream.   A firm’s channels can be a potent source of uniqueness, and may enhance its reputation, service,   customer  training,   and   many  other  factors.   In   soft drinks, for example, independent  bottlers are crucial  to differentiation. Coca Cola and Pepsi Cola spend a great deal of attention and money attem pt­ ing to upgrade bottlers and improve their effectiveness. Coke, for exam­ ple, has been arranging the sale of less effective bottlers to new, more capable owners. Similarly, observers credit Caterpillar Tractor’s dealers with providing an important  source of differentiation for Caterpillar. Cat’s approximately  250 dealers are by far the largest in the industry on average, and   their   size allows   them   to   provide   extensive service and buyer financing. Selective distribution  through  well-chosen outlets has also proven to be an extremely im portant  source of differentiation for such firms as Estee Lauder and Hathaway.

Firms can enhance the role of channels in differentiation through actions such as the following:

  • channel selection to achieve consistency in facilities, capabilities, or image
  • establishing standards and policies for how channels must oper­ ate
  • provision of advertising and training materials for use by chan­ nels
  • providing funding so that channels  can offer credit

Firms often confuse the concept of quality with that of differentia­ tion. While differentiation encompasses quality, it is a much  broader concept. Quality is typically associated with the physical product. Dif­ ferentiation strategies attempt to create  value for the buyer throughout the value chain.

2. Drivers of Uniqueness

A firm’s uniqueness in a value activity is determined  by a series of basic drivers, analogous to the cost drivers described in Chapter 3. Uniqueness drivers are the underlying reasons why an activity is W ithout  identifying them,  a firm cannot  fully develop means of creating new   forms  of differentiation   or   diagnose   how   sustainable its existing differentiation is.

The principal uniqueness drivers are the following, ordered ap­ proximately in terms of their prominence:

Policy Choices.      Firms make policy choices about what activities to perform and how to perform them.  Such policy choices are perhaps the single most  prevalent  uniqueness  driver. Johns  Manville chooses to provide extensive customer training in installing its roofing products, for example, while Grey Poupon chooses to advertise m ustard at a substantially higher rate of spending than  historical industry  practice. Much uniqueness, therefore, is discretionary.

Some typical policy choices that  lead to uniqueness  include:

  • product features and performance offered
  • services provided (e.g., credit, delivery, or repair)
  • intensity of an activity adopted (e.g., rate of advertising spend­ ing)
  • content of an activity (e.g., the information provided  in order processing)
  • technology employed in performing  an activity (e.g., precision of machine tools, computerization of order processing)
  • quality of inputs procured for an activity
  • procedures governing the actions of personnel  in an activity (e.g., service procedures, nature of sales calls, frequency of in­ spection or sampling)
  • skill and experience level of personnel employed in an activity, and training provided
  • information employed  to control  an activity (e.g., number of temperature, pressure, and variables used to control a chemical reaction)

Linkages.    Uniqueness often stems from linkages within the value chain or with suppliers and   channels  that  a firm   exploits.   Linkages can lead to uniqueness   if the   way   one activity   is performed  affects the performance of the other:

LINKAGES WITHIN THE VALUE CHAIN.  Meeting  buyer  needs often involves coordinating  linked activities.   For  example,   delivery time is frequently determined  not only by outbound  logistics but  also by the speed of order  processing and   the frequency of sales calls to take orders. Similarly, coordination  between the sales force and the service organization can lead to more responsive customer  service. Uniquely meeting buyer needs may also require the optimization  of linked activities. In a number of industries such as copiers and semicon­ ductors, for example, Japanese competitors have achieved dramatic reductions in defect rates by modifying every activity that  influences defects instead of relying on a single value activity such as inspection. Similarly, higher investment in indirect activities such as maintenance can improve the performance of direct activities such as finishing or printing.

SUPPLIER LINKAGES.   Uniqueness  in meeting buyer needs may also be the result of coordination  with suppliers. Close coordination with suppliers can shorten  new model development  time, for example, if suppliers tool up for producing  new parts  at the same  time as a firm is completing the design of equipment to manufacture  the new model. Similarly, missionary sales efforts by suppliers to a firm’s buyers can sometimes help differentiate a firm’s product.

CHANNEL LINKAGES. Linkages with channels can also lead to uniqueness in a variety of ways. By coordinating  with channels or jointly optimizing the division of activities between the firm and the channels, uniqueness can frequently result. Some examples of how linkages with channels can lead to uniqueness are as follows:

  • 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.

Timing. Uniqueness may result  from when a firm began per­ forming an activity. Being the first to adopt  a product  image, for example, may preempt others from doing so and make the firm unique. This is one of Gerber’s sources of differentiation in baby food. Early regulatory   approval  for its soft contact  lens gave Bausch   and  Lomb its differentiation. In other industries, moving late may allow a firm to employ the most  modern  technology  and thereby differentiate. Chapter 5 discusses first-mover and late-mover advantages in more detail.

Location.       Uniqueness   may   stem   from   location.   For  example, a retail bank  may have the most  convenient  branch  and  automatic teller machine locations.

Interrelationships.    The uniqueness of a value activity may stem from sharing it with   sister business   units.   Sharing   a sales force for both  insurance   and   other  financial   products,  as some   leading firms are beginning to do, may allow the salesperson to   offer   the   buyer better service. The  analysis of interrelationships  is described in Chap­ ter 9.

Learning  and spillovers.     The  uniqueness  of an activity can be the result of learning about how to perform  it better. Achieving consis­ tent quality in a manufacturing process may be learning-driven, for example.   As with cost, the spillover of learning to competitors  erodes its contribution to differentiation. Only proprietary learning leads to sustainable differentiation.

Integration. A firm’s level of integration may make it unique. Integration  into new value activities can make  a firm unique because the firm is better able to control the performance of the activities or coordinate them with other  activities. Integration  may also provide more activities to be sources of differentiation. Providing  service in- house instead of leaving it to third  party  suppliers, for example, may allow a firm to be the only firm to also offer service or to provide service in a unique way compared to competitors. Integration may encompass not only supplier or channel activities, but it may involve performing activities currently performed by the buyer. By connecting hospitals to its computer system and  allowing on-line ordering, for example, American Hospital Supply eliminates the need for some buyer activities and   differentiates   itself.   Integration  also   sometimes   makes the achievement of linkages with suppliers and channels easier. Reduc­ ing integration relative to competitors may be a source of differentiation in some industries. De-integration may exploit the capabilities of sup­ pliers or independent channels, for example.

Scale. Large scale can allow an activity to be performed  in a unique way that is not possible at smaller volume. For example, H ertz’s scale in car rental underlies some of its differentiation. H ertz’s many locations in all areas of the United  States provide more  convenient pick-up and drop-off  of cars, and faster   field   service.   The  relevant type of scale that leads to differentiation will vary— with Hertz  it is number of rental and service locations, while in another  industry  it might be the scale of plant that allows precise tolerances due to high speed equipment. In some cases, however, scale can work against the uniqueness of an activity. Scale may, for example, reduce the flexibility of fashion-related firms to buyer needs.

Institutional factors.       Institutional factors sometimes play a role in allowing a firm   to be unique.   Similarly,   a good   relationship  with its union may allow a firm to establish unique job definitions for em­ ployees.

The drivers of uniqueness vary for each activity and  may vary across industries for the same activity. The drivers interact to determine the extent to which an activity is unique.   A   firm   must  examine each of its areas of uniqueness to   see what  driver  or drivers underlie it. This will be critical   to   the   sustainability   of differentiation   because some uniqueness drivers provide more sustainability than others. Policy choices may be easier for competitors to imitate than uniqueness stem­ ming from interrelationships or exploiting linkages, for example. U n­ derstanding what allows it to be unique  will also ensure  that  a firm does not undermine the causes. Finally, the drivers of uniqueness may suggest new sources of differentiation.

Source: Porter Michael E. (1998), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press; Illustrated edition.

Leave a Reply

Your email address will not be published. Required fields are marked *