Pitfalls in Production Differentiation
Most profit and growth, even in steel and textiles, are going to the high value-added, differentiation-oriented, niche specialists. Many companies are catching on—niche-market strategies are the rage for computer makers (take supercomputer maker Cray's 43 percent return on equity this year), for solo hospitals ("best burn treatment center in Nebraska"), for retailers (the popularity of specialists like Banana Republic), and for automakers (witness Jaguar's resurgence).
But there can be things that are, effectively, too differentiated. Take Regent Air, former provider of $3,240 roundtrip, cross-country flights. The firm found a severely limited market at that price. Despite the genuine quality of its service, it shut down several months ago. Along the same line, Aston-Martin makes a superb automobile for $150,000. But in 72 honorable years it has found only 14,400 buyers.
Differentiation also can be negated by obvious weakness in a neglected part of an operation. For instance, how many "new-look," $175-a-night hotels have sprung up, with stunning architectural opulence—but where service is more reminiscent of a $20-a-night flea-bag motel. Customers' memory of the lousy service tends to outweigh the impressive decor.
A similar pitfall is illustrated in the marketing classic from the pet food industry. A renowned manufacturer broke the bank on market research. For instance, numerous packaging variables were tested to make the new product uniquely attractive to the purchaser. It paid off, at first. But soon, low repeat purchases scuttled the product. Everyone loved it—except the dogs.
Attempted differentiation can even be useless or distracting. Take a Detroit hotel I stayed at recently. Its elevator bank was in a circular arrangement, with a three-foot-high, burnished brass column in the center, on which reside large, bronze elevator up and down buttons. This clever and costly device never failed to infuriate me, because like most people, I expected to find the buttons on the wall beside the elevators.
Some early producers of highly differentiated products fail as a result of being too far ahead of their time. The first automatic teller machines and the first picture phones in the U.S. were fiascoes. The ideas were sound, but a decade or more passed before they caught on (the jury is still out on the latter invention).
Sometimes the idea is positively compelling, but still not "sold"—i.e., communicated—effectively. Scandinavian Air System's chief, Jan Carlzon, tells of a fare-reduction campaign launched years ago at the Swedish domestic airline, Linjeflyg. The "F50" program, as it was called, offered fares at 50 percent off, but flopped. When Carlzon took over the airline he retained the idea, but renamed it the "Twenty Dollar Plan," signifying the actual fare. This subtle switch from technical argot to plain talk caused the program to catch fire. Carlzon explains, "What people don't understand doesn't exist."
Despite the traps, differentiation is most often the winning strategy. A key is to understand what product or service differences will—or won't—be appreciated. A successful Kansas City office park developer lavishes attention on the exterior finish of his multi-story buildings, but only up to the twenty-five foot level. He explains that the eye stops seeing detail above that point, so he uses an attractive, but much less expensive finish higher up.
At the extreme, a customer may even perceive less expensive features to yield more value. One hotel chain saved a bundle by not providing shampoo and other bathroom amenities. Instead, it plainly posts signs that say "Did you forget anything?" and encourages guests to call for any needed toiletries, which will be brought up—for free. Besides saving money, this chain earned extra brownie points. Measured customer satisfaction went up because the explicit sign offering free items was perceived to be a more positive gesture than the implicit kindness when the hotel automatically offered these goods.
There are no hard-and-fast rules. Sources of differentiation range from design to quality to service to distribution. Some come from the accumulation of tiny improvements that add up to a commanding edge. Maytag's constant quest for top quality, along with superb marketing campaigns that boast about it, have led to astounding success in hotly contested, apparent commodity markets. Others' differences come from dramatic redefinition of a mundane activity. Federal Express created a cachet along with its useful service—and became a smashing success. And American Express plays to our emotions about personal credit worthiness; it continues to clean up in a violently competitive arena with its sustaining elite card image.
Specialists who constantly differentiate for ever more fine-grained niches are becoming stars in every sector of the economy. They are learning how to turn increasing demand fragmentation, more competitors, new technologies, and generic uncertainty into advantages. But beware: thoughtless specialization, differentiation, and niche definition are likely to be fraught with as much danger as thoughtless conglomeration that was the rage two decades ago.
(c) TPG Communications.
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