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 differentia­ tion and selecting a differentiation strategy.

  1. Determine who the real buyer is. The first step in differentiation analysis is to identify the real 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 signal­ ing criteria. Channels may also be buyers in addition to the end user.
  2. Identify the buyer’s value chain and  the f irm ’s impact  on 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  performance.  A firm must clearly under­ stand 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 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 perceive. 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 crite­ ria grows out of buyer value chain  analysis, buyer  interviews, and in-house expertise. The  process is iterative, and the list of buyer  pur­ chase criteria is refined continuously as an analysis proceeds.
  4. Assess the existing and potential sources o f 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 unique­ ness, 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 competi­ tors 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 o f existing and potential sources o f differentia­ 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-a-vis cost drivers will make  some forms  of differentiation more costly than others relative  to competitors.
  2. Choose the configuration o f value activities that creates the most valuable differentiation for the buyer relative   to cost o f 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 cumu­ late multiple forms of differentiation throughout the value chain, and address both use  and signaling criteria.
  3. Test the chosen differentiation strategy for 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     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  be­ comes too large.

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 *