Strategic Information System - Differentiation Advantage

Differentiation Advantage

Differentiation is the second of Porter’s two types of competitive advantage. In the differentiation strategy, one or more characteristics that are widely value by buyers are selected. The purpose is to achieve and sustain performance that is superior to any competitor in satisfying those buyer needs._A differentiator selectively adds costs in areas that are important to the buyer. Thus, successful differentiation leads to premium prices, and these lead to above-average profitably if there is approximate cost parity. To achieve this, efficient forms of differentiation must be picked, and costs must be reduced in areas that are irrelevant to the buyer needs._Buyers are like sellers in that they have their own value chains. The product being sold will represent one purchased input, but the seller may affect the buyer’s activities in other ways. Differentiation can lower the buyer’s cost and improve the buyer’s performance, and thus create value, or competitive advantage, for the buyer. The buyer may not be able to assess all the value that a firm provides, but it looks for signals of value, or perceived value.

A few typical factors which may lower the buyer’s costs are:

• Less idle time
• Lower risk of failure
• Lower installation costs
• Faster processing time
• Lower labor costs
• Longer useful life, and so on.

Figure No. 3 Representative Sources of Differentiation, shows a number of typical examples of activities that should be considered. It indicates the breadth and detail that must be involved in the study._Porter points out that differentiation is usually costly, depending on the cost drivers of the activities involved. A firm must find forms of differentiation where it has a cost advantage in differentiating._Differentiation is achieved by enhancing the sources of uniqueness. These may be found throughout the value chain, and should be signaled to the buyer. The cost of differentiation can be turned to advantage if the less costly sources are exploited and the cost drivers are controlled. The emphasis must be on getting a sustainable cost advantage in differentiating. Efforts must be made to change the buyer’s criteria by reconfiguring the value chain to be unique in new ways, and by preemptively responding to changing buyer or channel circumstances._Differentiation will nor work if there is too much uniqueness, or uniqueness that the buyers do not value. The buyer’s ability to pay a premium price, the signaling criteria, and the segments important to the buyer must all be understood. Also, there cannot be over reliance on sources of differentiation that competitors can emulate cheaply or quickly.

Porter lists seven steps to achieving differentiation:

• Determine the identify of the real buyer.
• Understand the buyer’s value chain, and the impact of the seller’s product on it.
• Determine the purchasing criteria of the buyer.
• Assess possible sources of uniqueness in the firm’s value chain.
• Identify the cost of these sources of uniqueness.
• Choose the value activities that create the most valuable differentiation for the buyer relative to the costs incurred.
• Test the chosen differentiation strategy for sustainability.

Focus Strategies for Advantage. Porter’s writings also discuss focus strategies. He emphasizes that a company that attempts to completely satisfy every buyer does not have a strategy. Focusing means selecting targets and optimizing the strategies for them. Focus strategies further segment the industry. They may be imitated, but can provide strategic openings._Clearly, multiple generic strategies may be implemented, but internal inconsistencies can then arise, and the distinctions between the focused entities may become blurred._Porter’s work is directed towards competitive advantage in general, and is not specific to strategic information systems. It has been reviewed here at some length, however, because his concepts are frequently referred to in the writings of others who are concerned with strategic information systems. The value chain concept has been widely adopted, and the ideas of low cost and differentiation are accepted. This section, therefore, is an introduction into a further discussion of strategic information systems. The implementation of such systems tends to be can implementation of the factors elucidated by Porter.