DIFFERENTIATION OF DIFFERENTIATION



DIFFERENTIATION OF DIFFERENTIATION

Valentina IVANČIĆ

Faculty of Economics (University of Rijeka)

Ivana Filipovića 4, 51000 Rijeka

vivancic@efri.hr

Tel./fax. 00385 (0) 51/355-131

Lara JELENC

Faculty of Economics (University of Rijeka)

Ivana Filipovića 4, 51000 Rijeka

ljelenc@efri.hr

Tel./fax. 00385 (0) 51/355-131

Abstract

Increase global competitiveness, reduced product life cycles, rapid technological advancements and dynamic customer requirements have drastically altered the nature of competition.

Researchers and entrepreneurs have different recipes and secrets on how to achieve competitive advantages. This article examines one of the possible sources of competitiveness: differentiation strategy.

In this article we realize the exigency to systematize differentiation factors in several categories depending on the differentiation subject. Differentiation subject we argue are: product, firm, country.

The results of our literary review show that the most important differentiation sources are based on innovations, resources, quality, brand and strategy. Differentiation encourages learning, research, development and reflection.

Key words: differentiation, competitive advantage, strategy

Introduction

Differentiation was recognized as a relevant research topic from the beginning of 20th century due the increased number of competitors.

Pakneiat M., Panahi M. and Noori J.(2010) according to Henderson (1989) argues that two firms can no coexist if they make their livings in identical ways and that' s the reason why firm distinguish from its rivals. There are many ways how firms achieve a competitive position on the market. For instance, Michael Porter suggests three strategies: cost leadership, differentiation or focus. Haberberg A. and Rieple A. (2008, p. 173) according to Michael Porter say that differentiation implies a unique and valuable offer for which customers are ready to pay more. But, the price premium must be justified by the unique aspects of the product or service. According to Grant R.M. (2005, p. 272-275) differentiation is not simply about offering different product features, it is about identifying and understanding every possible interaction between the firm and its customers, and asking how these interactions can be enhanced or changed in order to deliver additional value to the customer. By understanding what customers want, how they choose, and what motivates them, it is possible to identify opportunities for profitable differentiation. The fundamental issues of differentiation are also the fundamental issues of business strategy: Who are our customers? How do we create value for them? And how do we do more effectively than anyone else?

The potential in any product or service for differentiation is limited only by the boundaries of the human imagination.

Our key task is to discern which characteristics belong to each differentiation subject and determine if differentiation subjects have some common points and features as we mentioned in the abstract: product, firm and country.

Figure 1. Initial research model

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Source: authors

Product differentiation

Sources of product differentiation are systematized in several categories as follows:

• Resources and capabilities

• Innovations

• Branding and marketing menagement

• Technological leadership

• Quality

• Time

Analyzing differentiation opportunities, Grant R.M. (2005, p. 139, 274-275) distinguish tangible, intangible and human dimensions of differentiation. Tangible differentiation is concerned with the observable characteristics of a product or service that are relevant to customers’ preferences. This include features as size, color, weight, speed, durability, safety etc. Intangible differentiation opportunities satisfy desires for status, exclusivity, individuality, security and they depend on social, emotional and psychological motivational forces. They are based on technology, reputation and culture. Human resources are based on know how, capacity for communication, collaboration and motivation. This is important because it explain why an automobile or a restaurant have greater potential for differentiation than standardized products as cement, wheat or computer memory chips.

The following authors in their works emphasize the importance of resource based logic (RBV- resource based value): Penrose E. (1959), Wernerfelt B. (1984), Barney J.B. (1986), Peteraf M.A. (1993), Collins D.J., Montgomery C.A. (1995), Desmond W.Ng. (2007). They explain the imporatance of resources exploitation in achieving competitive advantages. Hamel&Prahalad (1990), Bullinger H.J. and Schweizer W. (2006) explain the role of knowledge menagement and organizational learning in building and maintaining a competitive edge, Lado and Wilson (1994) emphasize the human resources. Peteraf M.A. (1993) summarizes those views in four necessary conditions that must exist for a resource to be considered strategic: heterogeneity, imperfect mobility, ex ante limits to competition and ex post limits to competition.

So, resources and capabilities are significant only if exist a potential acces to them, if the contribute to customer benefit and if they are difficult to imitate. Hitt M. A. et al. (2002) warns that working with a large source endowment may maximize firm profit by focusing on better resources exploitation and this may cause negative effects such as reduction of experimentation and research, reduction of employee capability, strategy trasparence easy to understand and imitate, inflexibility to environments changes.

Porter, M. (1980), Grover, V., Fiedler K.D., Teng J.T. (1997), Swink, M. and Hegarty, W.H. (1998), Aulakh, P.S., Kotabe, M., Teegen, H. (2000), Bullinger H.J. and Schweizer W. (2006), Fung, H.G., Gao, G.Y., Lu, J., Mano, H. (2008), Li, J.J., Li, C.B. (2008), Lui, X., Wu, X. (2011) emphasize the importance of rapid product innovations, improoving engineering design and unique performances while Grant, R.M. (2005) and Vizjak A. (2011) interpreters innovations as the development of new business models (ex. lean production). Grant R.M. explains the difference between innovation and invention. Innovations are the result of creative ideas, but until implementation it remain only ideas while inventions represent the application of innovation in practice. Fung, H.G., Gao, G.Y., Lu, J., Mano, H. (2008) emphasize the importance of R&D functions in the process of creating new productive solutions.

Other authors argue the importance of marketing and promotion in the process of product differentiation. Porter M. (1980) underlines „brand reputation“, Grover, V., Fiedler K.D., Teng J.T. (1997) cite „brand recognition, advertising and innovative marketing“, Swink, M. and Hegarty, W.H. (1998) cite „product image“, Aulakh, P.S., Kotabe, M., Teegen, H. (2000) accentuate „customer loyalty to the brand“, Jao Wook Yoo (2006) cite „prestige and status, product information, reputation and advertising“.

Porter, M. (1980) cite „technology embodied in design and manufacture“, Swink M. and Hegarty W.H. (1998) cite „technological development in manufacture organization“, Li J.J., Li C.B. (2008) cite „superior technology“, Jao Wook Yoo (2006) and Ulaga W., Eggert A. (2006) cite „technological leadership“.

In terms of quality and supporting services Mintzberg et al. (1995), distinguish three dimensions of product quality-based differentiation: performance, uniqueness, and image. He argues that price, together with image, after sales support, quality, and design can be used as the basis of product differentiation. He does not accept the term cost leadership proposed by Porter M. (1980) and he uses the expression „price differentiation“ because the basis of differentiation is not higher quality, but lower price. For him it is precisely to use expression „price differentiation“ because low price represent an added value for customers.

Swink, M. and Hegarty, W.H. (1998) according to Garvin think that differentiation is based on superior or unique product performance, features, reliability, durability, serviceability or aesthetics. Allen R.S., Helms M., Takeda M.B., White C.S. (2007) argue „the quality may be based on fashion, brand name, or image“. Fung H.G., Gao G.Y., Lu J., Mano H. (2008) explaine the importance of „rigorous process improvements“. Porter, M. (1980) emphasized „the quality of purchased inputs and the quality control system“. Colin M., Hill C., Clarkson R. (2002) and Ulaga W., Eggert A. (2006) cite „responsive customer services“ as differentiation factor. Riginald M. and Lockamy A. (1999, p. 71) emphasize quality differentiation as a strategic initiative for achieving world-class performance levels.

In the differentiation process, however, it is not enough just to create innovations, improve quality, etc. but it is also essential to offer all these things before competition. So and Song (1998), Hum and Sim (1996) accentuate the importance of „ordering and delivery time“, Boyaca, T., Ray, S. (2003) talk about „time sensitive market“ while Rui, J., Lisboa, J., Yasin, M. (2002) cite the „time based differentiation“.

In the following table we summarize differentiation sources and authors mentioned below and we propose key words for each category.

Figure 2. Sources of product differentiation

|Sources |Authors |Key words |

|Resources and capabilities | |Resources & |

| | |capabilities |

|Resource based theory (RBV) |Penrose (1925), Wernerfelt (1984), Barney (1986), Peteraf M.A. (1993), Collins | |

| |D.J., Montgomery C.A. (1995), Grant R.M. (2005), Desmond W.Ng. (2007) | |

|Distinctive capabilities: |Hamel and Prahalad (1990), Bullinger H.J. and Schweizer W. (2006) |distinctive, knowledge|

|knowledge, organizational | |based, significant, |

|learning, teamwork, motivation, | |flexible |

|flexibility, responsiveness | | |

|Innovations |  |Innovation |

|Rapid product innovations, |Porter, M. (1980), Swink, M. and Hegarty, W.H. (1998), Aulakh, P.S., Kotabe, M.,|new, creative, speed |

|engineering design and unique |Teegen, H. (2000), Bullinger H.J. and Schweizer W. (2006), Fung, H.G., Gao, | |

|performances |G.Y., LU, J., Mano, H. (2008), Grover, V., Fiedler K.D., Teng J.T. (1997), Li, | |

| |J.J., Li, C.B. (2008), Lui, X., Wu, X. (2011) | |

|New business concepts |Grant, R.M. (2005), Vizjak A. (2011) |  |

|R&D |Fung, H.G., Gao, G.Y., Lu, J., Mano, H. (2008) |  |

|Branding and marketing menagement |  |Brand |

|Perceived prestige, status, style |Porter, M. (1980), Jao Wook Yoo (2006) |  |

| | | recognizable, |

|Brand recognition, product image, |Grover, V., Fiedler K.D., Teng J.T. (1997) |innovative, accepted |

|advertising, innovative marketing,| | |

|brand equity | | |

|Product information, reputation |Swink, M. and Hegarty, W.H. (1998), Aulakh, P.S., Kotabe, M., Teegen, H. (2000) | |

|Technological leadership |  |Technology |

|Superior technology development |Swink, M. and Hegarty, W.H. (1998), Porter, M. (1980), Jao Wook Yoo (2006), Li |  |

| |J.J., Li C.B. (2008) , Ulaga W., Eggert A. (2006) |R&D supported, |

| | |functional, superior |

|Quality |  |Quality |

|After sales support, design, |Porter, M. (1980), Mintzberg et al. (1995), Swink, M. and Hegarty, W.H. (1998), |improved, acceptable, |

|delivery speed, product |Robinson, T, Colin M., Hill C., Clarkson R. (2002), Ulaga W., Eggert A. (2006),|secure |

|durability, reliability and |Allen R.S., Helms M., Takeda M.B., White C.S. (2007), Fung, H.G., Gao, G.Y., LU,| |

|quality control |J., Mano, H. (2008) | |

| |Riginald M., Lockamy A. (1999) | |

|Product, process and service | | |

|quality improvement | | |

|Time |  |Time |

|Ordering time, delivery time, |So and Song (1998), Hum and Sim (1996) |  |

|Time based differentiation |Rui, J., Lisboa, J., Yasin, M. (2002) |priority, market |

| | |sensitive |

| |Boyaca, T., Ray, S. (2003) |  |

|Time sensitive market | | |

Source: authors

The figure below highlights the most important features and key words for product

differentiation.

Figure 3. Key words for product differentiation

creative

improveed recognizable

functional

Source: authors

Concluding remarks:

A product to differentiate successfully must be: creative, recognizable, functional and quality improoved. So, key factors of product differentiation are: innovations, brand, technology and quality.

Firm differentiation

Sources of firm differentiation include:

• Assets (phisical, human, financial and intangible)

• Culture and tradition

• Strategy

• Public relations (PR)

• Time

Penrose E. (1959) showed how over time firm built up human and physical resources and capabilities.

Prahalad C. K., Hamel G. (1990, p. 83-84) cite „distinctive capabilities based on knowledge developed through organizational learning“. They first introduced terms of core competences and distinctivness. Grant R.M. (2005, p. 171) focuses on resources of the firm and and the way resources are brought together to create organizational capabilities. He emphasize that resources and capabilities have the potential to establish sustainable competitive advantage for the firm. According to Haberberg A., Rieple A. (2008, p. 285, 317) firms use a wide range of resources: physical, financial, human, intellectual and reputational. But, each resource does not directly represent a source of sustainable competitive advantage. In other words, all resources are not strategically important in the same way. Strategic resource is only those which provides a significant benefit to a firm's strategic position. In order to count as strategic, a resource needs to meet for VIRUS criteria: valuable, inimitable, rare and unsubstitutable. This criteria were first laid down by Barney (1991), who uses the acronyms VRIN (valuable, rare, inimitable, nonsustituable) or VRIO. Haberberg and Rieple (2008, p. 289) mentioned physical assets (raw materials, mineral deposits, number of computers or retail outlets), financial assets (rarely strategic because money is avalable from banks, stock markets or venture capitalists), human assets (quality of life, attractive working conditions), intellectual assets (databases, patents, research programmes), reputional assets (firms brands, goodwill), relational assets (relational capital: relationships with customers and suppliers, alliance with partners and institutional capital: relationship with key institutions such as governments, local administration, religious bodies). Beside resources they also mention capabilities and competences such as product and process innovations, reliability, sensitivity to customer requirements, speed of reaction to customers, communication and reputation building. Teece et al. (1997) propose an extension of the firm resource based view introducing the term dynamic capabilities which empasized core competences dependent on knowledge, innovations, reliability and flexibility.

Stonehouse G. and Snowdon B. (1999) according to Senge (1990), Nonaka (1991), Helene&Sanchez (1997), Stonehouse&Pemberton (1999), Nonaka, Toyama, Konno (2000) and Stonehouse, Pemberton, Barber (2001) affirm that competitive advantage arises from internally developed core competences or distinctive capabilities based on knowledge. Grant R.M. (2005) and Kogut B. (1996) also reffered to knowledge and learning as two important differentiation factors.

Barney, J.B. (1986) in his work „Organizational culture: can it be a source of of sustained competitive advantage?“ and Buble M. et al. (2003, p. 69-70, 91) reffered to culture as relevant source in creation competitive advantage. Haberberg A., Rieple A. (2008, p. 324) show the beliefs system, relationships and structural hierarchy as important elements for firm differentiation.

Haberberg A., Rieple A. (2008, p. 342), Pakneiat M., Panahi M., Noori J. (2010, p. 248) argues how vision, mission and core values matter in determining firm capabilities.

Womack J.P., Jones D.T., Roos D. (1991, p. 343), Grant R.M. (2005, p. 230) and Bullinger H.J., Schweizer W. (2006. p. 3577, 3583) emphasize the importance of innovations in business models (ex. lean production, Toyota way, Keiretsu) as capability from which follows great sources for differentiation. Grant mentioned that Toyota's lean production system combines low cost, high quality and innovative product differentiation. Bullinger and Schweizer said that intelligent production always includes the following areas: customer in focus, fellow follows, management of knowledge and innovation.

Selznick P. (1957), Chandler A. (1962), Andrews K.R. (1971), Hitt M. A. et al. (2002) and Allen R.S., Helms M., Takeda M.B., White C.S. (2007) suggest superior leadership as respectable differentiation factor.

In firm differentiation process it is very hard to achieve firm reputation and recognition . If a firm have a great reputation this means that other differentiator factor were well implemented and customer have perceived this efforts. Swink, M. and Hegarty, W.H. (1998, p. 379) and Mintzberg (1988) define the bases for differentiation using customer' s perspective. They argue that image and reputation is a measure of customer’s evaluation of firm offer and behavior.

Grant R.M. (2005, p. 287- 288) says differentiation is effective only if credible communicated to customers. Brand name, warranties, expensive packaging, money back guarantees, sponsorship of sports and cultural events are carefully designed in reputation building process. Brand name and advertising are especially imporatant as signals of quality and consistency. Buble M. et al. (2003) mention as important the number of articles and firm apparences in the media. Favourable reputation reflects the firm image and helps promote the firm.

In this case it is also important to cite the time component. Stalk G. (1988) argues the importance of quick adaption to market conditions, quickly delivery and quickly innovations development than competitors.

Figure 3. Sources of firm differentiation

|Sources |  |Key words |

|Assets |Authors |Assets |

|Phisical assets: products, |Penrose E. T. (1959), Prahalad, C. K. Hamel G. (1990), Grant R.M. |  |

|machinary, raw materials, |(2005), Haberberg A., Rieple A. (2008) | |

|minerals | | |

| |Haberberg A., Rieple A. (2008), Penrose E.T. (1959) |valuable,profitable, |

|Human assets: number, | |tangible, intangible |

|motivation, education, ethics, | | |

|working conditios, | | |

|remunerations | | |

| |Haberberg A., Rieple A. (2008) |  |

|Financial assets: share price,| | |

|erning per share | | |

|Intangible assets: innovations,|Hamel&Prahalad, (1990), Senge (1990), Nonaka (1991), Kogut B. (1996),|  |

|knowledge, patents, |Teece et al. (1997), Helene&Sanchez (1997), Stonehouse&Pemberton | |

|partnerships |(1999), Stonehouse Nonaka, Toyama, Konno (2000), Pemberton&Barber | |

| |(2001),Grant R.M. (2005), Stonehouse G. and Snowdon B. (2007), | |

| |Haberberg A., Rieple A. (2008) | |

|Culture and tradition |  |Culture and tradition |

|Organizational culture |Barney, J.B. (1986), Buble M. et al. (2003), Haberberg A., Rieple A. |  |

| |(2008) | |

| |Haberberg A., Rieple A. (2008), Pakneiat M., Panahi M., Noori | long standing, |

|Vision, mission |J.(2010) |recognizable, routing, |

| | |consistent |

|Strategy |  |Strategy |

|New business models |Womack J.P., Jones D.T., Roos D. (1991), Grant R.M. (2005), Bullinger| |

| |H.J., Schweizer W. (2006) |thoughful, dinamic, |

| | |inimitable |

| | | |

|Managerial quality, superior | | |

|leadership |Selznick P. (1957), Chandler A. (1962), Andrews K.R. (1971), Hitt M. | |

| |A. et al. (2002), Allen R.S., Helms M.:, Takeda M.B., White C.S. | |

| |(2007) | |

|Public relations |  |Public relation |

|Local reputation, recognition, |Mintzberg (1988), Swink, M. and Hegarty, W.H. (1998), Grant R.M. | responsible, |

|firm's name, social |(2005) |personalizied, interractive|

|responsability | | |

| | | |

|Number of media apparences |Buble M. et al. (2003) | |

| | | |

|Time |  |Time |

|Quick adaption to market |Stalk, G. (1988) |quick, adaptive |

|conditions | | |

Source: authors

Figure 4. Key words for firm differentiation

profitable

profitable

interractive adaptive

inimitable

Sources: author

Concluding remarks:

A firm to differentiate successfully must be: profitable, adaptive, inimitable, interractive.

So, key factors of firm differentiation are: assets, strategy, pubblic relations and time.

Country differentiation

Everyone has heard for Indian tea, Japanese technology and Swiss watch. We are going to point out which are the sources and features that belong to this particular type of differentiation.

Sources of country differentiation include:

• Factor conditions

• Demand conditions

• Related and supporting industries

• Firm strategy, structure and rivalry

• Government

Michael Porter (1990) in his work "The Competitive Advantage of Nations" suggest that the level of country differentiation depends on factors mentioned below.

Country differentiation can be linked to the Ricardo’s theory of comparative advantages (David Ricardo,1817) which says that countries must specialize in the production of a commodity that could generate for itself a substantial profit in the long run. This means that each country will utilize natural resources, climatic conditions, geographic and demographic characteristics to create its best competitiveness in international markets. According to the Ricardo’s theory, Portugal has a comparative cost advantage over England in the production of wine, and a comparative cost disadvantage in the production of cloth. It would be then advantageous for Portugal to completely specialize in the production of wine and to exchange it for English cloth. Similarly, it would be more advantageous for England to completely specialize in the production of cloth. As a result, trade should take place between the two countries even if England has no absolute advantages over Portugal (Bouare, O., 2009, p. 102).

Although it is believed this theory has a static character because it analysis only two goods, two countries and labor costs, it still gives some important suggestions about the international division of production between countries. On the other hand, if it is true that each country should specialize in order to become more competitive, how to explain the case of China, which produces all sorts of things?

Porter M. (1990) argues other important sources that distinguish countries as follows.

Figure 5. Sources of country differentiation

|Sources |  |Key words |

|Factor conditions |Authors |Factor conditions |

|Labor, land, natural resources, |Ricardo, D. (1817), Porter, E.M (1990), Bouare O. (2009) |necessary, determinant, |

|capital, infrastructure | |sustainable |

|Research (R&D, innovations) |Porter, E.M (1990) | |

|Demand conditions |  |Demand conditions |

|Home demand |O'Shaughnessy N.J. (1996), Porter, E.M (1990) | |

|Export |O'Shaughnessy N.J. (1996), Porter, E.M (1990) |production supported, |

| | |incentive, constantly growing |

|Related and supporting industries |  |Related and supporting |

| | |industries |

|Delivery materials (input) |Porter M.E. (1990) | |

|Delivery components (machinary) |Porter M.E. (1990) |related, supporting, |

| | |interconnected |

|Firm strategy, structure and rivalry |  |Firm strategy, structure and |

| | |rivalry |

|Organization and menagement |Porter, E.M (1990) | |

|Capital and human resources |Porter, E.M (1990) | |

| | |creative, stimulating, |

|Geographic concentration and local |Porter, E.M (1990) |organized, adaptive |

|rivalry | | |

|Government |  |Government |

|Create favourable and dynamic |Porter, E.M (1990) |encouraging, stimulative, |

|conditions (enforce environmental | |cooperative |

|standards) | | |

|Encourage domestic rivalry and |Porter, E.M (1990) | |

|cooperation | | |

|Stimulate innovations |Porter, E.M (1990) | |

Source: authors

Figure 6. Key words for country differentiation

sustainable

interconnected growing

organized

Sources: authors

Concluding remarks:

A country to differentiate successfully must be: sustainable, growing, organized, interconnected.

So, key factors of country differentiation are: factor conditions, demand, related industries, firm strategy and structure.

Conclusion

If we put these three models together we find some common features and this allows to understand the differentiation strategy to a higher level. This approach enabled us to obtain the final model which shows common differentiation factors.

Figure 7. Final research model

innovations Assets

brand Strategy

technology PR

Time

quality

Demand

Factor conditions Related industry

Strategy and structure

Source: authors

So, differentiation strategy in each case include these factors: resources, strategy, innovations, brand and quality.

We believe all subjects need to differentiate at least by one of these criteria in order to be successful and different from others. For each differentiation subjects we explained which are the features of each group and which are their common differentiation sources.

For example, product innovation means new product or improvement of existing product, firm innovations on the other hand include new business models, new leadership’s concepts and new machinery, country innovation include norms and other instruments to reinforce some activities important for national economy development.

So, different perspectives to interpret the same factor.

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Market

Product

Firm

Common

Differentiaton factors ?

Country

Sources( Features

Resources- significant

DFJn–šÂÄêî T V X x z | Ô ü (*PTnp¸ìÛÊ¿­ž­ž­ž­Œ|q^|O|q¿­ž­ž­ž­|qh±k:h9WÙ0J>*B*[pic]ph$[?]?j[pic]h±k:h9WÙB*[pic]U[pic]phh±k:h9WÙB*[pic]ph-jh±k:h9WÙB*[pic]U[pic]ph#h|?4h9WÙ6?CJOJQJ^JaJh9WÙ6?CJOJQJ^JInnovations- creative

Brand- recognizable

Technology- functional

Quality- improoved

Time- sensitive

Product

Firm

Firm

Key defferentiators:

Resources

Strategy

Innovations

Brand

Quality

Sources ( Features

Assets- profitable

Culture and tradition- consistent

Strategy- inimitable

Public relation- interractive

Time- adaptive

Sources ( Features

Factor condistions- sustainable

Demand conditions- growing

Related and supporting industries- interconnected

Firm strategy, structure, rivalry- organized, stimulating

Government- encouraging

Country

Product

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