Differentiation

Consumers typically choose products and services that give them the greatest value. Thus the key to winning and keeping customers is to understand their needs and buying processes better than competitors do, and to deliver more value. To the extent that a company can position itself as providing superior value to selected target markets, either by offering lower prices than competitors do or by providing more benefits to justify higher prices. It gains competitive advan-tage.2 Solid positions are not built upon empty promises. If a company positions its product as offering the best quality and service, it must then delvoer the promised quality and service. Positioning therefore begins with differentiating the company's marketing offer, so that it will give consumers more value than competitors' offers do (see Marketing Highlight 10.1). It is not just a matter of being different; success comes from being different in a way that customers want, Arby's, the fast-food chain, explains how it competes by being different: 'Being

Figure 10.1

The new BCG matrix different makes you more interesting. Of course it's not always good to be different (you don't want to be the only one standing up in an electrical storm). But in most cases being different is good. Great tasting, lean Roast Beef and 3 fantastic ways. And no dull, boring burger!'

Not even' company can find many opportunities for differentiating its offer and gaining competitive advantage.J In some industries it is harder than others. The Boston Consulting Group explains four types of industry based on the number of competitive advantages and the size of those advantages (see Figure 10.1). The four industry types are:

1. Volume industries, where there are a few large advantages to be had. The airline industry is one of these. A company can strive for low costs or differentiate by sendee quality, but can win 'big' on both bases. In these industries, profitability is correlated with company size and market share. As a result, most minor airlines lose money while the main players try to form global alliances to build share. In this case almost all the industry leaders, like United Airlines, lloechst, Hitachi, Cnilever and Glaxo Wellcome are large, low-cost operators providing a high-quality sen'ice;1

2. Stalemate industries produce commodities where there are few potential advantages and each is small. Many old industries like steel and bulk chemicals fall into this category. In these industries it is hard to differentiate products or have significantly lower costs. European firms in these sectors often lose money, since they are unable to compete with products from economies with low-cost labour. Even size and modern plant cannot counter high labour costs.

3. Fragmented industries offer many opportunities to differentiate, but each opportunity is small. Many service industries are fragmented. Restaurants are an extreme example: Hard Rock Cafe has a global reputation and long queues, but its overall share of the market is small. Even market leaders, like McDonald's and KFC, have a small share of the marker relative to leaders in other industries. In fragmented industries, profitability is not closely related to size. For many years, global Pizza Hut was not profitable, while every large town has restaurateur millionaires who own few eating places. At the same time, many small restaurants fail each year.

4. Specialized industries offer companies many opportunities to differentiate in a way that gives a high pay-off. Pharmaceuticals is a specialized industry. A disproportionately large proportion of the world's most successful companies come from the sector where firms like Novartis, Glaxo Wellcome and Roche are market leaders for particular treatment. Less conspicuous specialized industries are those for scientific instruments and publishing.

volume industry An industry characterized by few opportunities to create competitive advantages, but each advantage is huge and given a high pay-off.

stalemate industry An industry that produces commodities and is characterised by a few opportunities to create competitive advantages, with each advantage being small.

fragmented industry

An industry characterised by many opportunities to create competitive advantages, but each advantage is small.

specialized industry An industry -where there are many opportunities forfirms to create competitive advantages that are huge or give a high pay-off.

Nintendo: More than Just Fun and Games

Marketv Highlig 10.1

In the early 1980s, no home could be without a video game console and a dozen cartridges. By 19S3 Atari, Coieco, Mattel and a dozen other companies offered some version of a video game system and industry sales topped S3.2 billion. Then, by 1985, home video game sales had plummeted to S100 million. Game consoles gathered dust and cartridges, originally priced as high as $35 each, sold for #5. Industry leader Atari, a subsidiary of Warner Communications, was hardest hit. Warner fired Atari's president, sacked 4,500 employees, and sold the subsidiary at a fraction of its 1983 worth. Industry experts blamed the death of the video game industry on fickle consumer tastes. Video games, they asserted, were just another fad.

However, one company, Nintendo, a 100-year-old toy company from Kyoto, Japan, did not agree, in late 1985, on top of ruins of the video game business, the company introduced its Nintendo Entertainment System (NES), Jtist one year later, Nintendo had sold over 1 million NES units. By 1991 Nintendo and its licensees were reaping annual sales of $4 billion in a now revitalized $5 billion video game industry. Nintendo had captured 80 per cent share of the market, and more than one out of every five United States households, slightly fewer in the EU, and 40 per cent of Japanese households had a Nintendo system hooked up to one of its television sets.

How did Nintendo manage to revive a dying industry? First, it recognized that video game customers were not so much fickle as bored. The company sent researchers to visit video arcades to find out why alienated home video game fans still spent hours happily pumping arcade machines. The researchers found that Nintendo's Donkey Kong and similar games were still mainstays of the arcades, even though home versions were failing. The reason? The arcade games offered better quality, mil animation and challenging plots. Home video games, on the other hand, offered only crude quality and simple plots

Despite their exotic names and introductory hype, each new home game was boringly identical to all the others, featuring slow characters that moved through ugly animated scenes to the beat of monotonous, synthesized tones. The video kids of the early 1980s had outgrown the first-generation home video games.

Nintendo saw the fall of the video game industry as an opportunity. It set out to differentiate itself by offering superior quality - by giving home video game customers a full measure of quality entertainment value for their money. Nintendo designed a basic game system that sold for under $100 yet boasted near arcade-quality graphics. Equally important, it developed innovative and high-quality 'Game Paks' to accompany the system. New games constantly appear and mature titles are weeded out to keep the selection fresh and interesting. The games contain consistently high-quality graphics, and game plots vary and challenge the user. Colourful, cartoon-like characters move fluidly about cleverly animated screens. Amidst a chorus of bongs, whistles and bleeps, players can punch out the current heavyweight boxing champ or wrestle Hulk Hogan, play ice hockey or golf, or solve word and board games. The most popular games, however, involved complex sword-and-sorcery conflicts, or the series of Super Mario Brothers fantasy worlds, where young heroes battle to save endangered princesses or fight the evil ruler, Wart, for peace in the World of Dreams.

By differentiating itself through superior products and service, and by building strong relationships with its customers, Nintendo built a seemingly invincible quality position in the video game market. But it soon came under attack. New competitors such as Sony and Sega exploited the opportunities created as Nintendo junkies became bored and sought the next new video thrill. Sony beat Nintendo at its own game - product superiority - when it hit the market with its PlayStation machine, an advanced new system that offered even richer graphics, more lifelike sound and more complex plots. Nintendo coun tered with the Nintendo 64 and a fresh blast of promotion, but the competition has intensified and, while Nintendo ~ were being discounted, the PlayStation was the Christmas hit toy of 1997.

Meanwhile the computer games world is attacked for being Violent, destructive, xenophobic, racist and sexist'. Sega Europe has also been attacked for marketing gruesome games such as Mortal Kombat and 'MDK' (Murder Death Kill). The industry has been criticized for cultivating a generation of 'Video Kids' for whom 30 seconds without scoring is boring; moral zombies hooked on worlds where the rules are shot or be shot, consume or be consumed, fight or lose. In Japan, where many of the games come from, consumers are more broad-minded than in most western countries. Nintendo needs to extend its customer range beyond the terminally fickle teenage males. Sega sponsored roadshows with teen magazines, and put girls in its TV ads after complaints from schoolchildren on its 'advisory board' about sexism in advertising. Sega Europe created a new toy division to target 'housewives with children, instead of 14-year-old boys'. The first product will be Pico, an electronic learning aid for kids that has taken a 'significant' share of the Japanese high-tech toys market. The S8 million European launch included TV. press and posters with a full below-the-line campaign. Next will be an 'electronic learning aid that thinks it's a toy' for three- to seven-year-olds.

Ail to no avail. While Nintendo and Sega chased the new markets, Sony's PlayStation blasted the 1997 Christmas market with the 'arcade feel' of Ridge Racer and Crash Bindicoot and 'scary, tension building' Doom. Also a new company appeared with a little gadget that attracted masses of new customers. Tamagotchi's virtual pets rose and fell like the fad they were. Although the sophistication and range of Giga Pups and Nano Pets grew and prices declined, virtual pet owners proved as capricious as other computer game players. Euromonitor forecasts that the world market for video games will fall by 30 per cent by the year 2000. Other pundits suggest that few people will buy a game machine when all houses have a Pentium II wired to the World Wide Web. Could all computer games machine makers now be heading for Henry's Virtual Pet Cemetery V Will 2000 be doom for the Tomb Raiders?

SOURCES: See Rebecca Fannin, 'ZapV, Marketing and Media Decisions (November 1989), pp. 35-40; Raymond Roel, "Fhis power of Nintendo'. Direct Marketing (September 1989), pp. 24-9; Stewart Wolpin, 'How Nintendo revived a dying industry'. Marketing Communications (May 1989), pp. 36-4(1; Kate Fitzgerald, 'Nintendo, Sega slash price of videogames', Advertising Age (ft June; 1992), p. 44; Richard Lfrandt, 'Clash of the Titans', Business Week (7September 1992), p. 34; Mark Jones and Margaret Bennett, 'Game over?', Marketing Business (December-January 1993-4), pp. 8-11; Kos Snowden, 'Now Se{>a iirra targets mothers', Marketing Week (1 October 1994), p. 9; 'Dip into the future, t'aras cyborg eye can see: and wince', Tim Economise (3 January 1997), pp. 81-3; 'Computing: that's entertainment', Wiiich? (December 1997); Henry's Virtual Pet Cemetery (/hmai. ho me. mi ndsring.com).

Figure 10.2 shows the returns to be had from differentiation. It shows results taken from the Profit Implications of Marketing Strategy (P1MH) study of American and European firms.s This study shows that firms with the lowest return on investment (KOI) operate in commodity markets where there is no differentiation on quality or anything else, such as the coal industry. Where there is room for differentiation, losers have inferior quality (Aeroflot) and more returns than winners (KLM). The most highly performing group of companies are 'power companies', which have superior quality in differentiate markets (BMW, Bertelsmann and Nokia). These are ahead of nichers (local airlines), which score lower on quality and ROI than the 'power companies'. According to PIMS, the 'power companies' often have a high market share, since quality, share and KOI are interrelated.

Differentiation may be harder in some industries than others, but creative firms have shown that any market can be differentiated.6 Pew people see the brick market as exciting, but one briek company found a way of getting a competitive

4.38 • Chapter 10 Positioning

advantage. Bricks used to be delivered to building sites in a truck that tipped them on to the ground. In the process many bricks got broken or lost. Workers on the site also had to spend time stacking the bricks. The brick company's idea was to put the bricks on pallets that were lifted off the truck by a small integral crane. The idea was so successful that soon all bricks came that way. The firm's next idea was to carry a small off-the-road fork-lift truck with the bricks, so that it could deliver them to the exact spot where the site manager wanted them.

Oil is a stalemate industry, but Shell remains the leading petroleum retailer by understanding that fuel is a distress purchase that people do not enjoy. They succeed by making their petrol stations easy to use and paying attention to all the other reasons people srop on a journey: to find their way, get a snack, make a phone call or go to a clean toilet.

Differential advantages can be transient. Some companies find many major advantages that are easily copied by competitors and are, therefore, highly perishable. This is particularly true in financial services, where successful ideas are quickly followed by competitors. The Bank of Scotland's Direct Line insurance company succeeded by offering an economic and high-quality personal insurance service through television advertising and telephone selling. It was so successful that established insurers had to follow. Zurich Insurance intends to attack the conservative German and Italian insurance markets in the same way,7

The solution for companies facing the erosion of their advantage is to keep identifying new potential advantages and to introduce them one by one to keep competitors off balance. These companies do not expect to gain a single substad tial permanent advantage. Instead, they hope to manage a series of advantages that will increase their share over time. This is how market leaders like Microsoft, Intel, Sony and Gillette have held their position for so long. The true competitive advantage of these firms is their market knowledge, technological expertise, creativity and entreprcneurship, which give them the ability to develop products quickly.

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