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Home arrow Library of Research Articles arrow Branding Research arrow Differentiation: Are Product, Brand And Service Still Enough
Differentiation: Are Product, Brand And Service Still Enough PDF Print E-mail
Written by Daniel Park   
07 Feb 2006

DIFFERENTIATION: ARE PRODUCT, BRAND AND SERVICE STILL ENOUGH, Written By Daniel Park, Associate Consultant, B2B International Ltd

Introduction

I am very pleased to have been asked to guest-write for the “White Paper” series of B2B International.  This series aims to exchange ideas and stimulate thought rather than provide research-based academic discourse.  My paper is therefore deliberately speculative.  I hope it will provoke thought on a subject - differentiation - that I believe is undergoing interesting change.  This text is relatively short and does not contain the customary multiplicity of references and footnotes, but rather draws at certain points on a small selection of publications that I consider shed light on to the question of the changing nature of differentiation.

Marketers are constantly searching for differentiation.  Unless a company has a genuine scientific or technological advantage, preferably one that can be protected by a patent, competitors can more often than not match any incremental change in an ever-shortening time-scale.  Taking cost out of an operation, maybe through new tools and techniques in operational management, relocating production to areas of lower labour cost, or a combination of both, likewise creates advantage that can be sustained only over a relatively short time.  This is true of manufacturing and service industries alike.  It is why so much manufacturing has migrated into China and so much software development and IT-based services have migrated into India.

These moves would have happened on cost grounds alone; however there is another dimension.  The general raising of educational standards and the speed with which knowledge is disseminated nowadays mean that socio-economic development is being accelerated and that certain industrialising economies are achieving rates of change that were unheard of even as recently as 20 years ago.  The internet is just one tool for disseminating knowledge that is open to competing organisations worldwide.  Where this tool is used to enhance an existing robust business, the effect on the established competitive structure can be very significant.  This is a phenomenon that is becoming known as time compression.  Companies are now in a race to bring a stream of incremental changes to product and service faster than before and this is becoming the real differentiator: the difference between the financial performance of first-in-class and third-in-class is widening and the famous bell-shaped curve applied to profitability distribution between players in a given market is becoming flatter.  According to recent research across many sectors done by Stanford University, the number of companies and the percentage of sector revenue generating twice the average industry sector profit have been declining steadily over the past 20 years.  The winner may not take all, but does take an increasing share of available value.

Twenty years ago one of the mainstream channels of thought in marketing strategy (indeed in business strategy more broadly) was the need to choose between price leadership and differentiation and to avoid being “stuck in the middle”.  This particular distinction is now less valid.  Given the wider and more even diffusion of technology and dissemination of knowledge, price is becoming much more of a differentiator.  To take a simple example, the phrase “made in China” no longer signifies a lower standard of quality: the fact that well-educated and well-trained Chinese workers do not have minimum two televisions per home, do not think of a car as a necessity and do not regard two foreign holidays per year as a right means that they can use cost/price as a very effective differentiator.  This argument does not (yet) apply to all products: the important issue here is that it is gradually and inexorably applying to an increasing number.  It applies also in the service sector.  Ryanair differentiates itself as “The Low-Fares Airline”, making price the biggest element in its marketing strategy.  The success of Ryanair compared with British Airways, in parallel with its earlier counterparts in the USA and their established competitors, illustrates the power of price as a differentiator when no amount of promotional hype and advertiser’s candy-floss prose can disguise the fact that (a) economy class airline seats are not significantly differentiated and (b) everyone’s service standards have more-or-less converged.

Achieving and sustaining a competitive cost/price balance has always been required: the problem now is that it is more difficult to do, and the characteristics of the end product cannot be guaranteed to do it all for you.
“What is differentiation?” - the question revisited

This question looks fairly simple.  Differentiation exists when consumers under conditions of competitive supply and faced with a range of choices (a) perceive that product offerings do not have the same value and (b) are prepared to dispose of unequal levels of resource (usually money) in acquiring as many of the available offerings as they wish.  It is, however, a little more complicated; and it is the concept of value itself that complicates it.

What determines value?

There are two dimensions to this answer.  The first is what can be termed “techno-economic logic”, the second “emotional logic”.  What is clear, however, is that these two logics have one thing in common - they are defined by the customer, not by the supplier.  Understanding the relative significance of each and communicating this to a consumer faced with increasingly wide choice are the essential requirements in achieving differentiation.  Since this is getting more difficult to achieve in the first place and to sustain over time for the reasons I have set out, we need to understand two broader concepts of business.  These emerging determinants of value, and the potential source of renewable differentiation, are twofold: (a) the supply chain and (b) the product experience.  I believe that these two concepts are beginning to move our focus away from the three traditional elements of product, brand and service.  Though I acknowledge that these three elements remain a part of marketing, my argument is that their significance has changed from being “order winners” to “order qualifiers”.

Evidence

In a witty and painstakingly researched book the American marketing specialist Jack Trout points out the extent of product and brand proliferation that has taken place over the past 20 years.  The following is an abridged version of a particularly revealing analysis (figures relate to the USA market).

The Explosion of Choice

Item                                 Early 1970s  Late 1990s

KFC menu items               7               14
S.U.V. styles                       8               38
Breakfast cereals           160             340
Airports                             11,261        18,202
New book titles               40,350        77,446
Levi’s jeans styles             41               70
Running shoe styles           5             285
Contact lens types               1               36
TV channels in Houston Texas   5             185
Websites                                 0   4,757,894

Source:  Trout (2000), page 6.

The point is that demand has not grown by anywhere near the rate of growth in choice.  It is this clear trend to product/brand proliferation and increasing fragmentation of markets and market segments that poses the challenge in differentiation.

There is simply not enough product differentiation to go around.  Product packages/extensions used to work: they no longer always do (at least not for very long) because they can more often be copied and improved by competitors at an increasing speed.  Let us take an example of a service product with which we are all familiar - air travel.

Frequent flyer miles constitute a vivid example of just how short an innovative idea can be effective.  In the mid-1980s American Airlines introduced AAdvantage.  This differentiating concept was a great success for a while, until most other competitors realised that they could do likewise.  Along with this many of American’s customers eventually amassed so many flyer miles that they could not redeem them within the period of time-to-expiry.  American was engulfed in a sea of complaints from their prime segment (the frequent flyer).  Goodwill was destroyed: badwill was created.  Fortunately for American this problem quickly hit all competitors and thus was to some extent neutralised fairly quickly.  American’s remedy was simple, namely to abolish the time-to-expiry feature of the product.  The point is this: as a differentiator the effective life-cycle of frequent flyer miles/points and their differentiating power were much shorter than the airlines originally anticipated.  Not surprisingly, like exchangeable currencies this “quasi-currency” has gradually been subject to inflation and value reduction.

From the early 1990s onwards the world’s major airlines joined together to form marketing alliances to offer “seamless” travel worldwide.  Just about every major airline now belongs to an alliance: this mechanism was open to being copied and improved in a relatively short time, and therefore any marketing advantage was short-lived.  Does this matter?  Not critically, since the true benefit is found in cost-reduction.  The airlines have been able to reduce their facilities worldwide and share each other’s, thereby gaining greater asset utilisation and containing investment and overhead costs.  The problem now is that the benefits from this have all been realised and the airlines remain under financial pressure.

In an industry that has been protected by regulation for almost the whole of its existence (and to a great extent still is), the shake-out as markets have become freer has been severe.  The profit problems of the industry have not been entirely due to the recent volume effect following 9/11 and the period of international insecurity: the airline industry was already facing declining profitability over many years despite a rising market, because a small number of truly differentiated players took advantage of several factors to enter and develop the business on the basis of a new approach.  They were differentiated: their differentiation was based on the following.

(a) A superior understanding of the potential of the industry’s supply chain

(b) A superior understanding of the changing motivations, value concepts and decision-frames of a variety of existing and potential customers

To consider the supply chain dimension, let us return to Ryanair.  This airline bucks the trend in the business.  It makes price the big differentiator and this compensates for the openly-acknowledged fact that it flies from secondary airports to secondary airports that may be slightly further from main centres than the scheduled airlines and major airports.  It supports its price differential by leasing rather than owning its whole fleet; by having a standard fleet of Boeing 737 aircraft; by outsourcing many operational services; and by being 100% upfront as to what the customer gets and does not get for (not much) money spent.  It is a fundamentally different approach to this business and it makes money at a time when just about every other airline is reporting losses.  It illustrates the significance of understanding the supply chain and the potential that can be unlocked by looking at the supply chain in a different way.

Let’s stick with Ryanair to illustrate the changing decision-frames of the customer.  Consumers realise that there is now virtually no differentiation between airlines in terms of product, even in the upper travel classes.  The product is becoming commoditised and there is little opportunity for sustainable differentiation (for example, the much-publicised “flat bed” in British Airways’ business class was copied in a matter of months).  Ryanair, modelling itself on the American carrier Southwest, understood that there is a point at which travellers will trade off benefits for price.  For example, it required simple but effective marketing to point out that the customer was paying a very high price for an assigned seat and “free” meals.  Given Ryanair’s seat price, the lack of an assigned seat became a non-issue for the customer and the availability of reasonably-priced food and beverages dealt with that aspect of customer expectations.  On my most recent Ryanair flight, about one-third of the flyers were obviously business people like myself.  Ryanair’s supply chain is both focused (cost) and also differentiated (outsource-versus-own).

Think about others in various businesses that were first to re-define the supply chain in ways that customers value - Dell with Dell Direct (late industry entrant but displaced large established competitors); Amazon.com (ultimate range of choice, fast supply); E-bay (ease of access, rapid transaction).



Last Updated ( 07 Feb 2006 )
 
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