Steps in differentiation of the firm

The concepts in this chapter can be summarized by outlining the analytical steps necessary for determining the bases for differentiation and selecting a differentiation strategy.

  1. Determine who the real buyer is. The first step in differentiation analysis is to identify the real buyer. The firm, institution, or household is not the real buyer, but rather one or more specific individuals within the buying entity who will interpret use criteria as well as define signaling criteria. Channels may also be buyers in addition to the end user.
  2. Identify the buyer’s value chain and the firm’s impact on it. A firm’s direct and indirect impact on its buyer’s value chain will determine the value a firm creates for its buyer through lowering buyer cost or raising buyer A firm must clearly understand all the ways it does or could affect its buyer’s value chain, and how possible changes in the buyer’s value chain will impact the equation. Channels may play a role in affecting the buyer’s chain as well as through linkages with the firm’s chain.
  3. Determine ranked buyer purchasing criteria. Analysis of the buyer’s value chain provides the foundation for determining buyer purchase criteria. Purchase criteria take two forms, use criteria and signaling criteria. Uniqueness in meeting use criteria creates buyer value, while uniqueness in meeting signaling criteria allows that value to be realized. Sometimes an analysis of the buyer’s value will suggest purchase criteria that the buyer does not currently Purchase criteria must be identified in terms that are operational, and their link to buyer value calculated and ranked. The analyst must not shrink from finding ways to attach a specific value to performance and cost savings, even for household buyers. The identification of purchase criteria grows out of buyer value chain analysis, buyer interviews, and in-house expertise. The process is iterative, and the list of buyer purchase criteria is refined continuously as an analysis proceeds.
  4. Assess the existing and potential sources of uniqueness in a firm’s value chain. Differentiation can stem from uniqueness throughout a firm’s value chain. A firm must determine which value activities impact each purchase criteria (see Figure 4-6). It must then identify its existing sources of uniqueness relative to competitors, as well as potential new sources of uniqueness. A firm must also identify the drivers of uniqueness, because they bear on the question of sustainability.

Since differentiation is inherently relative, a firm’s value chain must be compared to those of competitors. Careful analysis of competitors is also invaluable in understanding how value activities impact the buyer, and in seeing possibilities for creating new value chains. Another technique for uncovering possible new ways to perform value activities is to study analogies—industries producing similar products or selling to the same buyer that may do things differently.

  1. Identify the cost of existing and potential sources of differentiation. The cost of differentiation is a function of the cost drivers of the activities that lead to it. The firm deliberately spends more in some activities to be unique. Some forms of differentiation are not very costly and pursuing them may even lower cost in ways that the firm has overlooked. Normally, however, a firm must deliberately spend more than it would have to otherwise to be unique. A firm’s position vis-à-vis cost drivers will make some forms of differentiation more costly than others relative to
  2. Choose the configuration of value activities that creates the most valuable differentiation for the buyer relative to cost ôf differentiating. A subtle understanding of the relationship between the firm’s and the buyer’s value chains will allow a firm to select a configuration of activities that creates the largest gap between buyer value and the cost of differentiation. Most successful differentiation strategies cumulate multiple forms of differentiation throughout the value chain, and address both use and signaling
  3. Test the chosen differentiation strategy for sustainability. Differ- entiation will not lead to superior performance unless it is sustainable against erosion or imitation. Sustainability grows out of selecting stable sources of buyer value, and differentiating in ways that involve barriers to imitation or where the firm has a sustainable cost advantage in differentiating.
  4. Reduce cost in activities that do not affect the chosen forms of differentiation. A successful differentiator reduces cost aggressively in activities that are unimportant to buyer value. This will not only improve profitability, but also reduce the vulnerability of differentiators to attack by cost-oriented competitors because the price premium becomes too large.

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

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