UNIT 8 DIFFERENTIATION AND FOCUS

Transcription

1 Business Leve Strategy UNIT 8 DIFFERENTIATION AND FOCUS Objectives After going through this unit, you shoud be abe to: understand the concept of differentiation; distinguish between tangibe and intangibe differentiation; expain the advantages and disadvantages of differentiation; understand the concept of focus; and acquaint yoursef with variants of focus. Structure 8.1 Introduction 8.2 Concept of Differentiation 8.3 Types of Differentiation 8.4 Sources of Differentiation 8.5 Cost of Differentiation 8.6 Advantages and Disadvantages of Differentiation 8.7 Focus: A Concept 8.8 Summary 8.9 Key Words 8.10 Sef-Assessment Questions 8.11 References and Further Readings 8.1 INTRODUCTION 20 Strategy and competitive advantage exist to defend against competitive forces and securing the consumers. Competition in modern times have become a part and parce of any activity. It has become the deciding factor of regarding the success and faiure of any business organization. With competition, the performance of any firm s activities be it creativity, innovation, R & D, organization cuture, etc. can be determined. Taking this into view the competitive strategy has been deveoped. Basicay it aims at estabishing a profitabe and sustainabe position against the forces that determine industry competition (Porter, 1985). Strategy and competitive advantage go hand in hand, hence competitive strategy is formuated. Porter has defined business eve strategy as competitive strategy and cassified it into three basic strategies, vis-a-vis overa cost eadership, differentiation and focus. We have aready discussed the concept of cost and cost eadership in unit 7. In this unit, we wi discuss differentiation and focus. Cost eadership stresses on producing quaity products at ow cost for the consumers who are price sensitive. Differentiation is a strategy, which is directed at producing goods and services considered unique in its industry and directed at consumers who are reativey price-insensitive. Focus strategy concentrates on producing products and services that fufi the needs of sma groups of consumers (David, 1997) and is based on segmentation. To gain competitive advantage, it is essentia for the firms to transfer skis and expertise among autonomous business units effectivey. The competitive

2 advantages in cost eadership differentiation and focus can be achieved depending on factors ike; type of industry, size of firm, and nature of competition. Differentiation strategy is more of a positioning strategy whereby the firm tries to be unique in its industry by positioning itsef aong certain dimensions. The degree of differentiation varies with different strategies. Differentiation is industry-wide whereas focus strategy is based on a segment or group of segments in the industry. There are two variants of focus strategy, which are cost focus and differentiation focus. This unit discusses a these aspects. Differentiation and Focus 8.2 CONCEPT OF DIFFERENTIATION Every individua customer is unique in itsef so is his/her preferences regarding tastes, preferences, attitudes, etc. These needs of the customers are fufied by the firms by producing differentiated products. In our day-to-day ife we see many such exampes of differentiated products. Most of the fast moving consumer goods ike; biscuits, soaps, toothpastes, ois, etc. come under the category of differentiated products. To satisfy the diverse needs of the customers, it becomes essentia for the firms to adopt a differentiation strategy. To make this strategy successfu, it is necessary for the firms to do extensive research to study the different needs of the customers. A firm is abe to differentiate from its competitors if it is abe to position itsef uniquey at something that is vauabe to buyers. Differentiation can ead to Differentia advantage in which the firm gets the premium in the market, which is more than the cost of providing differentiation. The extent to which the differentiation occurs depends on the overa strategy of the firm. Previousy differentiation was viewed narrowy by the firms, but in the present scenario it has become one of the essentia components of the firm s strategy. Reiance Infocomm, offers varied products ike; different faciities to its customers in the CDMA teephones. This is differentiation. When we tak of differentiation, it can be said that virtuay any product can be differentiated (Sader, 2004). The greatest potentia of differentiation ies in products, which are of compex nature but do not have to adhere to strict reguatory standards, but the success of a differentiation strategy depends on the firm s commitment towards customers and the understanding of customer needs as differentiation is a about perceiving on the part of the customer of something unique. Differentiation can be said to have more competititve advantage than the cost advantage as it is quite difficut to imitate the differentiated products. Even if the initiation is done in terms of concept, then aso a particuar product remains unique regarding its vaue, stye, packaging, etc. Therefore, when we tak about differentiation, it is important to understand the demand of the customers and fufiing this demand keeping in mind the differentiation advantage. In this case, one thing the firms shoud concentrate on its creativity and innovativeness than on market research. We have discussed about the concept of differentiation as a whoe but we need to know the why aspect of differentiation, i.e., why do the firms need differentiation? Need There are a number of reasons depending on the nature of firm to adopt a differentiation strategy. It is not necessary that the firm shoud and must go for differentiation strategy if it does not require one. The requirement is need based and depends on the firm s position in the market. There are a number of factors which resut in differentiation. Some of them are as foows: to compete against the rivas; to create entry barriers for newcomers by buiding a unique product; to reduce the threats arising from the substitutes; to deveop a differentiation advantage. 21

3 Business Leve Strategy Looking at these reasons, one can say that differentiation indeed heps the firms to get a competitive advantage over its riva firms. Activity 1 Give the exampes of any three major firms, which have achieved differentiation advantage by adopting differentiation strategy. Do name the differentiated products they are offering. 1) 2) 3) 8.3 TYPES OF DIFFERENTIATION Differentiation can be cassified into two basic types vis a vis. Tangibe differentiation Intangibe differentiation As the name suggests, tangibe means, something which is rea and can be seen, touched, etc. whereas intangibe means, something which is abstract in nature and cannot be touched, it can just be fet. We have aready discussed the tangibe aspect. Infact most of the time whie discussing differentiation, we actuay discuss the tangibe differentiation. Tabe 8.1 shows some of the opportunities avaiabe for creating uniqueness within the firm. These opportunities in one way or the other measure the performance of the firm, but when these opportunities are reated to the customer s psychoogy, the intangibe aspect to differentiation comes into the picture. Tabe 8.1: Opportunity for Creating Uniqueness within the Firm 22 Activity Purchasing Design Manufacturing Deivery Human Resource Management Technoogy Management Financia Management Marketing Differentiation opportunity Quaity of components and materia acquired Aesthetic appea Robustness of performance Ease of maintenance Minimization of defects Speed in fufiing customer orders Reiabiity in meeting promised deivery items Improved training and motivation increases customer service capabiity Permits responsiveness to the needs of specific customers Improves stabiity of the firm Buiding of product and company reputation through advertising Providing pre-saes information to customers Customer Service Source: Adapted from Sader, Phiip (2004). Strategic Management.

4 Projecting an image about a particuar product is one form of intangibe differentiation. This can be done with the hep of packaging, stye, etc. This shows that tangibe as we as intangibe go hand in hand and either of them cannot exist independenty. Exhibit 1 shows some tangibe and intangibe components, which resut in differentiation of a particuar product. Differentiation and Focus Exhibit 1: Tangibe and Intangibe Components of Differentiation Tangibe Design Packaging Stye Quaity Composition Intangibe Image Brand Company reputation Customer preferences Intangibe differentiation is more effective in those cases where the customer has once experienced the product, for exampe, chocoates. Every brand has a unique taste, different packaging stye, etc. This is the case where quaity can be judged ony after using the product once but in case where the quaity cannot be judged by experience, e.g., medica services, the intangibe differentiation is not that effective. In short, it can be said that intangibe differentiation is accompanied by tangibe differentiation. 8.4 SOURCES OF DIFFERENTIATION Its not ony the ow price at which different products are offered, which creates differentiation, instead the firm can differentiate from its competitors by providing something unique, which is vauabe to the customers of that product. Differentiation occurs from the specific activities a firm performs and how they affect the buyer. Vaue Chain: It shows that differentiation occurs out of the firm s vaue chain (Porter, 1985). The vaue activity determines the uniqueness of the product. The vaue chain consists of a set of vaue activities resuting in the production of a specified product. The vaue activities for each differentiated product differs depending on the nature of the product. The steps of vaue activity range from procurement of raw materia to the sae of product. Each differentiated product has its own vaue activities. To understand this concept, et us take an iustration. Iustration Cadbury, a we-known company of dairy products, manufactures different brands of chocoates, i.e., it has a set of differentiated products regarding chocoates. In India, it offers brands ike; Dairy Mik, Five Star, Perk, etc. Each product is manufactured through a different set of activities as the taste of each is different. If we compare the products at the goba eve, then aso they are differentiated. For exampe, dairy mik in India is eggess whereas in other parts of the gobe, it has egg as one of its ingredient. This shows that the product can be differentiated keeping in mind a set of vaue activities comprising of both tangibe and intangibe components of differentiation. These activities incude a kinds of activities ike; marketing activities, financia activities, HR activities, production activities. If these activities are performed propery, then ony a differentiated product can satisfy the customers and get premium over the cost of the product. 23

5 Business Leve Strategy Activity 2 24 Think of some exampes of differentiated products/services of two firms having different set of products and ist them. 1) 2) There can be more differentiating factors. Some of them are as foows: (Porter, 1985) abiity to serve customers needs anywhere; simpified maintenance for the customers; singe point at which the buyer can purchase; superior compatibiity among products. One thing is important here that these factors require consistency and proper coordination to achieve them. Uniqueness There are a number of factors, which determine the uniqueness of a firm in a vaue activity. Apart from cost factor, there are many more factors, which are responsibe for differentiated products. The foowing are the factors or drives (according to Porter): Poicy Choice Links Timing Location Inter-reationships Learning Integration Scae Institutiona factors Poicy Choice: Every firm decides its own poicies regarding the activities to be performed and the activities to be ignored. The poicy choices are basicay reated to the type of services to be provided to the customers, the credit poicy, to what extent a particuar activity (ike; advertising spend) be adopted, the content of activity, ski and experience required by the expoyees, etc. Links: The uniqueness of a product depends to a arge extent on the inks within the vaue chain with suppiers and distribution channe, the firm deas with. If the firm has a good ink with suppiers and has a sound distribution channe, then it becomes easy for the firm to produce and suppy the products to the end-users. Timing: The firms can achieve uniqueness by encashing the opportunities at the right time. If the timing is perfect then a successfu differentiation strategy can be adopted.

6 Location: This is one of the important factors for the firms to have uniqueness. For exampe, a bank may have its branch which is accessibe to the customers, then the bank wi gain an edge towards other banks. Interreationships: A better service can be offered to the customers by sharing certain activities, e.g., saes force with the firm s sister concerns. Learning: To perform better and better, continuous improvement is necessary and this comes through continuous earning. Integration: The firm can be termed as unique, if its eve of integration is high. The integration eve means the coordination eve of vaue activities. Scae: Larger the scae, more wi be the uniqueness. If sma voumes of products are produced, then the uniqueness of the product wi be ost over a onger period of time. A very good exampe can be home-deivery services. The type of scae eading to differentiation varies depending on the individua firm s activities. Institutiona factors: This factor sometimes pay a roe in making a firm unique, ike reationship of management with empoyees. Looking at these factors one can say that differentiation is governed by vaue activities in a vaue chain and these activities in turn are governed by certain driving factors, which makes the firm unique. Differentiation and Focus 8.5 COST OF DIFFERENTIATION Differentiation is normay costy. The differentiation adds costs as it invoves added features to cater to the needs of the customers. Usuay the cost is incurred in the foowing cases: Increased expenditure on training; Increased advertising spend to promote the product; Cost of hiring highy skied saesforce; Use of more expensive materia to improve the quaity of the product, etc. There can be many more cost drivers depending on the nature of the firm s activity. It is not necessary that differentiation is aways costy. Some differentiation are surey costy but if the vaue activities are coordinated propery, the cost can be minimized. The cost of maximizing profits by minimizing costs can surey be achieved. It is beieved that differentiation in having more product features can be more costy than having different but more desired features. Simiary, for bigger products, differentiation is ikey to be ess costy than for the sma products ike soaps. The cost of differentiation more or ess depends on the cost drivers. The cost drivers determine the uniqueness of the differentiation activity for a particuar firm. The different forms of differentiation have different effect of cost drivers. But the crux of the whoe concept is that the cost be minimized to achieve an appropriate differentiation strategy, which gives a premium price for the product. Though it is very difficut to deveop a trade-off between differentiation and cost efficiency but not impossibe. This practice is very popuar in case of automobie industry where different firms have many variants but the difference is basicay reated to the features of the product. With the word becoming smaer due to high technoogica innovations, differentiation strategies adopted by many firms is accompanied by computer aided work cuture. Though appication of modern technoogy increases the cost but on the other hand, the abour cost is reduced to a arge extent and technica efficiency achieved is very high. The economies of scae can be expoited to a arge extent with the hep of a trade-off between cost and differentiation. 25

7 Business Leve Strategy 8.6 ADVANTAGES AND DISADVANTAGES OF DIFFERENTIATION Everything is accompanied by advantages and disadvantages and so is differentiation. Let us first discuss the advantages of differentiation foowed by disadvantages. Advantages Premium price for the firm; Increase in number of units sod; Increase in brand oyaty by the customers; Sustaining competitive advantage. Premium price for the firm: When the firm is abe to expoit a sources of differentiation that are ess costy or are not costy, then the firm can differentiate from its riva firms. There can be many exampes ike changing the mix of product features than adding more features, which are ess costy but differentiate the product giving a competitive advantage, i.e., the price premium to the firm. Increase in number of units sod: If the product is unique then the demand for it increases, henceforth increasing the number of units sod. A very good exampe is of Maggie noodes, which has competition from big companies ike Top Ramen, but is sti considered to be different from its rivas. Here, the number of customers are won by smart differentiating strategy, thereby increasing the number of units sod. Increase in brand oyaty by the customers: A we-positioned and differentiated product gains the brand oyaty of the customers. For exampe, Nescafe. It has deveoped a brand oyaty amongst coffee overs. First, it came in powdered form, but it differentiated itsef by coming in granuar form, maintaining the quaity. Once experienced, the brand oyaty or customer oyaty for a particuar brand is deveoped. Sustaining competitive advantage: Last, but not the east, this is the crux of the differentiation. This can be achieved by optimizing cost and increasing profits. It is more often known as ow-cost differentiation strategy. It is the combination of a three advantages discussed above. Looking at these advantages, one can say that encashing the buyer/customer vaue is the must. The firms must concentrate on those activities which affect the customer vaue than the ones which do not. Disadvantages 26 It is not necessry that everytime the firm goes for differentiation strategy, it is successfu. At times there are disadvantages associated with it. Some of the most common disadvantages are: Uniqueness of the product not vaued by buyers; Excess amount of differentiation; Loss due to differentiation. Uniqueness of the product not vaued by buyers: There are a number of cases where the differentiated product has not gained importance by the customers, hence faied to position itsef in the market. Uniqueness necessariy does not ead to differentiation. More important is the perception of buyers regarding a particuar product.

8 Excess amount of differentiation: Too much of anything is bad. Same is the case with differentiation. If the firm is unabe to understand the customer needs and preferences but goes on differentiating the product, then the firm oses its market vaue. Unnecessary differentiation resuts in faiure. Differentiation and Focus Loss due to differentiation: In certain cases the firm whie differentiating does not reaize the importance of coordinated activities in the vaue chain, which resuts in high costs. Considering the fact that differentiation aways eads to profitabiity is absoute nonsense. This resuts in oss to the firms. The disadvantages associated with differentiation shoud be ooked upon with utmost care by the firms going in for differentiation. 8.7 FOCUS: A CONCEPT The third business eve strategy is focus. Focus is different from other business strategies as it is segment based and has narrow competitive scope. This strategy invoves the seection of a market segment, or group of segments, in the industry and meeting the needs of that preferred segment (or niche) better than the other market competitors (Boter & Mcmanus, 1999). This is aso known as a niche strategy. In focus strategy, the competitive advantage can be achieved by optimizing strategy for the target segments. Focus strategy has two variants. They are: Cost Focus; and Differentiation Focus Cost focus is where a firm seeks a cost advantage in the target segment; and Differentiation focus where a firm seeks differentiation in the target segment (Cherumian, 2004). We sha discuss these variants ater. When we tak about focus strategy as a niche strategy, it means that a market niche is chosen where customers have distinct preferences or requirements. According to Thompson and Strickand the term niche is defined as geographic uniqueness, by speciaised requirements in using the product or by specia product attributes that appea ony to niche members (Rao, 2004). The success of the focus strategy depends on the difference of the target segment from other segments. To expain this concept, et us take exampe of soft drink market. Coca Coa and Pepsi are the major payers in the Indian market and are rivas but each has deveoped a competitive advantage by serving different segments offering favoured drinks as we. Coca Coa has different brands ike; Thums Up, Limca and Pepsi has brands ike Lehar Pepsi and Sprite catering different market segments. The focuser can aso have an above average eve of performance by having an appropriate cost-focus and differentiation focus strategies. Focus strategy can be effective in certain situations ony. According to Rao (2004), foowing can be the situations where a focus strategy is efficient: Market segment arge enough to be profitabe; Market segment has good growth potentia; Market segment is not significant to the success of major competitors; Focuser has efficient resources; focuser is abe to defend against chaenges; High costs are difficut to the competitors to meet the speciaised needs of the niche; Focuser is abe to choose from different segments. There can be more situations depending on the need of the focuser. 27

9 Business Leve Strategy Focus/niche strategy has certain advantages as we as disadvantages or risks associated with it. Advantages Focus strategy, if impemented propery, has foowing advantages: Focuser can defend against Porters competitive forces; Focuser can reduce competition from new firms by creating a niche of its own; Threat from producers producing substitute products is reduced; The bargaining power of the powerfu customers is reduced; Focus strategy, if combined with ow-cost and differentiation strategy, woud increase market share and profitabiity. Risks The risks associated with focus strategy can be: Market segment may not be arge enough to generate profits; Segment s need may become ess distinct from the main market; Competition may take over the target-segment. We can very we say that the main objective of the focus/niche strategy is to perform a better job of serving buyers in the target market niche than rivas. Activity 3 List one exampe each of automobie sector, technoogy sector, and airines where the companies of respective sectors have adopted focus strategy. 1) Automobie... 2) Technoogy... 3) Airines... Let us now discuss the two variants of focus. Cost Focus This is basicay a niche-ow cost strategy whereby a cost advantage is achieved in focusers target segment. According to Porter, cost focus expoits differences in cost behaviour in some segments. In this the focuser concentrates on a narrow buyer segment and out-competes rivas on the basis of ower cost ( Differentiation Focus In this, the firm offers niche buyers something different from rivas. Here, the firm seeks differentiation in its target segment. Differentiation focus expoits the specia needs of buyers in specified segments. A very good exampe of differentiation focus is the newy aunched MayBach uxury car. This car is targetted to a certain segment where the customers can afford to pay a sum as arge as Rs. 6 crore. This is just one exampe, there can be many more exampes where the cost of the product may not be so high. 28 After understanding a these business/generic strategies, we can say that if a the three are combined and the cost is optimized, then the market share and profitabiity can be increased. Figure 8.1 expains this concept.

10 A B B Focus ow-cost/ Low-cost/Differentiation Differentiation Mutipe strategies Differentiation and Focus PROFITABILITY Focus Low-cost Focus Differentiation Low-cost Differentiation Figure 8.1 Source: Adapted from Rao, P. Subba (2004). Business Poicy and Strategic Management. Focus strategy can be a too to hep the management team define and rebuid their business strategy, in turn heping them gain an edge over their competitors. 8.8 SUMMARY The three business/generic strategies, viz. an overa cost eadership, differentiation and focus, pay an important roe in the success of a business. A the three strategies can be used individuay or in combination to create a sustainabe competitive advantage. Porter has specificay suggested that these strategies can be used to defend against the competitive forces. In unit 7, the concept of cost was discussed. In this unit, the effort has been made to deveop an understanding of differentiation and focus and how the two can be brought into practice. In differentiation, the firm tries to be unique in the industry whereas in focus, the firm tries to concentrate on a specific segment or a niche market. Overa, the unit tries to deveop a practica approach towards understanding the business strategies. 8.9 KEY WORDS MARKET SHARE Competitive advantage: It is about how a firm puts the business strategies into practice. Differentiation: A strategy where a firm seeks to be unique in its industry aong some dimensions that are widey vaued by buyers. Focus: A strategy which invoves the seection of a market segment, or group of segments, in the industry and meeting the needs of that preferred segment (or niche) better than the other rivas SELF-ASSESSMENT QUESTIONS 1) Expain the concept of differentiation strategy. Iustrate your answer with suitabe exampes. 2) Suppose you are the business strategist of your company, which is into manufacturing FMCGs. What woud be your differentiation strategy ooking at the present trends? Discuss. 3) Is focus strategy reevant in the present context? Discuss. 29

11 Business Leve Strategy 8.11 REFERENCES AND FURTHER READINGS Kourdi, Jeremy. (2004). Business Strategy: A Guide to Effective Decision-making. The Economist Newspaper Ltd. Sader, Phiip. (2004). Strategic Management. Kogan Page India Pvt. Ltd. Boten, Nei and McManus, John. (1999). Competitive Strategies for Service Organisations. MacMian Press Ltd. Cheruniane, Francis. (2004). Business Poicy and Strategic Management. Himaaya Pubishing House. Rao, P. Subba. (2004). Business Poicy and Strategic Management. Himaaya Pubishing House. David, R. Fred. (1997). Concepts of Strategic Management. Prentice Ha Internationa Inc. Porter, E. Michae. (1985). Competitive Advantage Creating and Sustaining Superior Performance. The Free Press. 30