Wednesday, November 02, 2005

Marketing - Build a distinct brand with Product Differentiation

It is a widely accepted tenet of marketing that companies can sustain competitive advantage only through product differentiation based on unique features and benefits. But this is only half the truth. Products win when differentiation is based on features or benefits which are valued by customers.

Unless a product is really different from the competing product in terms of what the customers perceive its value and market differentiation, it is bound to fail (or fail to win).

Yet, many companies wrongly allocate millions of dollars to add a slight twist to their product : A new color, a new taste, a new chemical, or a new label — to distinguish it from the previous version. They put an equal amount of money into promoting their new-and-improved product through advertising and other marketing campaigns. Their return, over the long term, is usually marginal. The reason why this happens is due to the fact that marketers have built a perceived product difference for their products when compared to the competition - But customer does not care or value those differences. Take for example, the web enabled refrigerator from Whirlpool, or Intel’s ‘Manitoba’ processor for Cell phones, or IBM’s routers. These products failed to create a significant differentiation in the minds of the customer and disappeared from the market.

Meaningful Differences

So What’s going wrong? When companies are so preoccupied with fiddling with individual products and brands, they lose sight of the value they can create for customers.
If Manitoba, Motorola Razr cell phone, Via C6 CPU, or Transmetta disappeared tomorrow, most customers would hardly notice. At most a few will be slightly inconvenienced by having to switch to an alternative.

But how would the customers feel if HP, Qualcomm, CISCO, DELL or IBM disappears? Such an event will have a tremendous impact on several customers. These companies represent an entire category — Printers, CDMA chips, Routers, Personal Computers, or Enterprise systems. Notice how these companies represent an entire sector. These category leaders are being rewarded by customers for constantly raising the standards and quality. And these type of companies are what customers care about.

To become an industry leader, companies must really know what customers care about and then deliver more than their expectations. As long as a company is listening to the customer’s needs and constantly are able to beat customer’s expectations, they will be rewarded by customers in form of market leadership.

Take Broadcom for example, Broadcom launched Ethernet MAC chip which was faster and cheaper than that from the incumbent leader 3COM. Qualcomm then sold their ethernet solution to Cisco, Linksys and others. Soon Broadcom became a leader in Ethernet solutions and has maintained that position ever since - by constantly raising the performance bar for its chips while lowering the price for customers.

Another example, In 1993, Unilever launched Mentadent toothpaste, a combination of toothpaste, baking soda, and peroxide delivered through a clever pump. Within two years, Mentadent became a $250 million brand with a 12 percent share of the U.S. toothpaste market, an impressive figure in this crowded category.

Why? Because Unilever understood that dental hygiene is what’s on people’s minds when they buy toothpaste. So the company created a product that offered superior dental hygiene. Unlike a meaningless pink stripe down the middle of the toothpaste, this was differentiation that made a difference.

Maintaining Innovation

In today’s fast pace of business, where the value added to products and services may quickly be commoditized, it’s essential for companies to be focused on customer expectations to be keenly aware of the product features that customers want, and to continue to deliver them as they improve their offerings and the expectations for the category. If they do not do these things, companies risk losing market leadership.

Xerox, US based leader in photocopiers, learned this lesson well when it lost its market leadership to Cannon and had a near death experience. Xerox for long dominated the photocopier market and concentrated on developing big office copiers and ignored the needs of small offices. Japanese manufacturers - Panasonic, Kyocera and Cannon soon discovered the need for small desktop copiers and quickly captured a huge market share. Xerox in the mean time had also failed to develop office printers. Cannon licensed its Laser printing technology to HP - and HP soon took market leadership in office printers. By failing to listen to customer’s needs, Xerox failed to innovate and that caused the company to fall from its mighty position.
What these examples tell us, and what we have learned, is that most companies succeed by consistently satisfying basic customer needs better than the competition, not by continuously pitching them a unique selling proposition.

Branding for Services & Esoteric products

My firm makes custom chips for customers - referred as ASICs (Application Specific Integrated Circuits). To build a distinct brand, the firm has to differentiate itself from the competition - mainly the incumbent leaders LSI Logic, IBM, Fijitsu, and Samsung, by offering products to customers which beat their expectations (Note that in almost all cases, customer’s expectations are being set by the incumbent leaders). Merely offering better product/service is not enough - we have to know and understand what customer needs are and then offer more than what they are expecting.

In such cases, the new entrant is the challenger. Challengers can win only when they beat incumbent’s offerings in the minds of the customer i.e., the customer must feel that the challenger’s offering is superior to that of the market leader, and the challenger provides a risk free migration path for the customer to move his existing business from the incumbent. Only then a strong brand can be built by the challenger.

Often times, firms which offer high tech products or services fail to distinguish themselves from the competition. For example, Wipro, TCS and Infosys - three leading IT services providers from India. These firms collectively have been able to differentiate from the market leaders: IBM, EDS & Accenture. But have failed to distinguish among themselves. Customers cannot distinguish Wipro from Infosys from TCS.

Another example would be Open-Silicon and eSilicon. Both these silicon valley firms are fabless ASIC vendors challenging the market leaders. Yet customers cannot really differentiate Open-Silicon from eSilicon.

This happens because the challenger is focused on beating the incumbent and forgets that other companies(challengers) exist. The only way to create a distinct brand in such cases is to focus away from beating the incumbent - and focus on what the customer needs. And then figure out ways to beat customer’s expectations. The product/service features that help meet & beat customer expectations will then become the key brand attributes - which can be advertised to promote the product. This on the long run creates a distinct brand in the minds of the customer - and over a period of time will help the company build a market leadership position.
For example, take the example of Southwest Airlines. Southwest airlines concentrated on providing low cost air travel with minimum hassle. Over the period of time, Southwest Airlines has developed several brand attributes: No assigned seating, No in-flight food service, no business class, Humorous flight attendants, on-time flights and low fares. Southwest Airlines has developed a strong brand name in US aviation - based on distinct brand attributes.

Conclusion

Building a distinct brand in the minds of customers is possible only when customer perceive that they are getting a distinctly superior product or a service when compared to that offered by the competition. This has been proven several times in the past - Southwest, Qualcom, IBM, Uni-Lever etc. succeeded only because they listen to customer’s needs and beat their expectations.

5 comments:

Saraswathi Bhat said...

Good article. Apt examples to make one understand the theory behind importance of product differentiation.

TheWhiteSeal said...

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rashmi said...

well written, I would say...
I teach Marketing, and the examples were really good.
keep it up!

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