Value Creation: Differentiation Pays Off

Dec. 21, 2004
Look for attributes that will strip products of their 'commodity' label

All sorts of products, from metal stampings to computers to silicon chips, are reaching commodity-like status. And the more similar they are to commodities, the less value products have to the companies that manufacture them.

Faced with this situation, executives must find ways to differentiate their products. Of the many value-creation tools at your disposal, few work as well as product or service differentiation.

All customers are attracted to products for which they perceive a distinguishing advantage over the competition. It's that difference that allows manufacturers to capitalize on other value determinants, such as market dominance.

Further, the more differentiated a product is, the less price sensitive it will be -- another factor that quickly escalates a company's value. For manufacturers of components and devices for other manufacturers, these differentiating traits determine their customer's profit margin and directly affect how they can lower their costs. Whatever your differentiation strategy, it must add value in terms of greater customer satisfaction (for consumer goods), lower cost, and unique features (for production goods).

Begin your search for differentiating characteristics by making a list of the factors, both tangible and intangible, that distinguish your products in your customers' eyes: Tangible features are observable differences that make your products or services better, cheaper, or faster. For your company they might include attributes such as size, weight, color, design features, materials used, technology embedded in the product, new technology that the product can now make use of, safety, speed, durability, reliability, consistency, and adaptability.

Along with these primary characteristics don't forget to include differentiating features that complement the product, such as presale and after-sale service, parts availability, ease of upgrading, credit policies, speed of delivery, and accessories. Intangible differentiation is the "aura" of the product. Intangibles say something about the buyer. Look for characteristics such as exclusivity, quality, individuality, security, and image.

Strategies for Differentiation

Harley-Davidson motorcycles are a good example. These are low-tech, expensive, heavyweight machines compared to the competition. However, the intangible aura Harley created was one of image, lifestyle, and adventure. The brand became the manifestation of rugged American individualism against which other models, such as those from Japan, never stood a chance. If a differentiating characteristic is not sustainable at a cost that allows a profit, its value is low.

For example, being the low-cost leader for large U.S. steel plants during the 1970s was a short-lived distinction. The minimills eventually replaced the larger facilities as the industry's low-cost leaders. Where technology plays a role in differentiation, its sustainability always will be questionable due to personnel mobility and the ease of technology transfer.

The cost to create and maintain a particular differentiation is an important consideration. Such costs often include advertising, higher inventory levels to ensure availability, high-quality components, and raw materials. Differentiating strategies that lower profit margins should fall to the bottom of your list.

Finally, think of a chain that links the manufacturer with raw-material suppliers, subassemblers, primary customers, and end users. Place your company where it belongs in this chain. Now determine how your top three differentiating strategies add value for your customer and that customer's customer.

Ideally, these strategies will lower your customers' costs and help them differentiate their products to their own customers. The best value-creation strategies are those offering the greatest differentiation from competition, are sustainable for the longest time, and are achieved at the least cost. With some thought, the quest for differentiation can become an important weapon in the battle to create breakthroughs in your own company's value.

Chris Malburg is director of value-creation services at a consulting organization in Southern California. He is the author of The Controller's and Treasurer's Desk Reference (1994, McGraw-Hill Inc.) and The Cash Manager's Handbook (1992, Prentice Hall).

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