Service As A Differentiator In Commodity Type Markets

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HSLV January 2006HSLV January 2006

Service as a Differentiator in Service as a Differentiator in Commodity Type MarketsCommodity Type Markets

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Themes for the EveningThemes for the Evening

IntroductionIntroduction Theoretical UnderpinningsTheoretical Underpinnings

– Augmented Product ConceptAugmented Product Concept

– Lifecycle TheoryLifecycle Theory

– A look back at Generic TheoriesA look back at Generic Theories» PorterPorter

» MathurMathur

– ServitisationServitisation

– Relationship MarketingRelationship Marketing

Research Paper and DiscussionResearch Paper and Discussion

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Augmented Product ConceptAugmented Product Concept

Levitt’s Augmented Product ConceptLevitt’s Augmented Product Concept– Core BenefitsCore Benefits– Other Aspects that help define the product and Other Aspects that help define the product and

brand etcbrand etc– More ‘intangible’ aspects help position the More ‘intangible’ aspects help position the

product in the market spaceproduct in the market space Useful concept to hold - consumer and Useful concept to hold - consumer and

industrial products equally validindustrial products equally valid

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Life cycle TheoryLife cycle Theory

Stage theory - useful to relate the stage Stage theory - useful to relate the stage theory with a strategic viewpoint - how theory with a strategic viewpoint - how does strategy change with lifecycle stages ? does strategy change with lifecycle stages ? This is well documented in the literatureThis is well documented in the literature

Useful though in industrial markets is the Useful though in industrial markets is the Transaction Lifecycle (TLC) concept. I use Transaction Lifecycle (TLC) concept. I use this in my paper. this in my paper.

See next slide and Mathur’s LRP paper and his 1988 JGM paper

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Chasm

FIRST-OFFS NICHE ENTRY MASS ENTRY

The Early The First Few The Mainstream Market Market

Custom Packaged Standardisation Mass CustomisationSolutions Solutions

Technology Visionaries Pragmatists Conservatives ScepticsEnthusiast

Crossing the Chasm

Source: Geoffrey Moore

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Transaction Lifecycle ModelTransaction Lifecycle Model

New packages of merchandise and support introduced

SYSTEM

COMMODITY

DE-SYSTEMISATION SYSTEMISATION

Some packages Repackaging of differentiated increasingly un-bundled merchandise and support

PRODUCT & PRODUCT & SERVICE SERVICE

Some Merchandise andMerchandise support substitutedand support and addeddeleted

COMMODITISATION DE-COMMODITISATION

Differences quickly Differencescopied Introduced

Mathur (1988)

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The Marketing-Engineering Balance over the Stages of the Technology Life Cycle

Engineering Efforts

MarketingEfforts

Stages of Technology

Cutting State of the Advanced Mainstream Mature Decline Edge Art

Low

High Low

High

Source: Popper & Buskirk (1992)

Current position of industry

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Generic TheoriesGeneric Theories

Porter (1980) - we are familiar withPorter (1980) - we are familiar with

– Low Cost and differentiationLow Cost and differentiation

– New interpretations suggest Porter’s exclusivity can be New interpretations suggest Porter’s exclusivity can be challenged. We can have a mixed strategy - low cost challenged. We can have a mixed strategy - low cost AND differentiation togetherAND differentiation together

Mathur (1988) has an alternative viewpoint and one that Mathur (1988) has an alternative viewpoint and one that we can use to help our case in devising strategy in we can use to help our case in devising strategy in industrial product - markets. He proposes 4 polar strategiesindustrial product - markets. He proposes 4 polar strategies

SystemSystem ProductProduct

ServiceService CommodityCommodity

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Mathur Cont..Mathur Cont..

4 Polar points 4 Polar points – SystemSystem

– ProductProduct

– Service Service

– CommodityCommodity

Linked throughLinked through– Merchandise and SupportMerchandise and Support– Expertise and PersonalisationExpertise and Personalisation

In each case we can have the factors In each case we can have the factors differentiated or differentiated or undifferentiatedundifferentiated

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The Four Polar Generic StrategiesThe Four Polar Generic Strategies

MERCHANDISE

Differentiated

MERCHANDISE

Undifferentiated

SUPPORT SUPPORT

Differentiated Undifferentiated

SYSTEM PRODUCT

SERVICE COMMODITY

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EXPERTISE

Differentiated

EXPERTISE

Undifferentiated

PERSONALISATION

Differentiated Undifferentiated

CONSULTANT SPECIALIST

AGENT TRADER

Dimensions of Support Differentiation

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Dimensions of Merchandise DifferentiationDimensions of Merchandise Differentiation

CONTENT

Differentiated

CONTENT

Undifferentiated

IMAGE IMAGE

Differentiated Undifferentiated

EXCLUSIVE SPECIAL

AUGMENTED STANDARD

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Potential Strategy Trajectories to Escape the Potential Strategy Trajectories to Escape the ‘Commodity Trap’‘Commodity Trap’

MERCHANDISE

Differentiated

MERCHANDISE

Undifferentiated

SUPPORT SUPPORT

Differentiated Undifferentiated

SYSTEM PRODUCT

SERVICE COMMODITY

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Differentiation strategyDifferentiation strategy Create value for buyerCreate value for buyer Also communicate their uniquenessAlso communicate their uniqueness Bear the cost of being unique but minimise Bear the cost of being unique but minimise

the added coststhe added costs Trade off between cost and differentiationTrade off between cost and differentiation Sustain the differentiation - constantly Sustain the differentiation - constantly

invest new sources of buyer valueinvest new sources of buyer value Challenge is to be both low cost and Challenge is to be both low cost and

differentiation (Dess & Miller 1993)differentiation (Dess & Miller 1993)

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ServitisationServitisation

The integration of product and service elements to create a The integration of product and service elements to create a ‘whole’‘whole’

It is the core product and the augmented product rolled into It is the core product and the augmented product rolled into oneone

The firm competes with key service features to create The firm competes with key service features to create competitive advantagecompetitive advantage

Usually this is integrated Usually this is integrated backwardsbackwards to suppliers and to suppliers and forwardsforwards to customers to customers

This approach is most useful when combined with This approach is most useful when combined with relationship managementrelationship management

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Product

Service

Product with Service as Product and Service an Add-on Package as an Integrated Package

and Inseparable

Product

Service

Integrated

Non-Servitised Servitised

See Roquette as an example

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Research methodologyResearch methodology

Part of a wider studyPart of a wider study Quantitative and qualitativeQuantitative and qualitative In depth interviews with three commodity In depth interviews with three commodity

chemical producers over two years with a chemical producers over two years with a wide variety of respondentswide variety of respondents

Postal survey, 62 valid responses from Postal survey, 62 valid responses from sample of 116sample of 116

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Indicative findingsIndicative findings

Aim to identify business attributes that are Aim to identify business attributes that are perceived as importantperceived as important

Eight service attributes found Eight service attributes found One service attribute found significant at One service attribute found significant at

the 5% level namely “regular contact with the 5% level namely “regular contact with customers”customers”

This attribute is at the very heart of This attribute is at the very heart of marketing and especially relationship marketing and especially relationship marketingmarketing

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Some quotationsSome quotations

““..seeks standards of quality and service ..seeks standards of quality and service which our customers regard as being which our customers regard as being consistently better than those of consistently better than those of competitors” (Alpha 1996)competitors” (Alpha 1996)

““..focus is on efficiency and customer ..focus is on efficiency and customer service ...” (Beta 1997)service ...” (Beta 1997)

All staff will or towards satisfying our All staff will or towards satisfying our customers ....” (Gamma 1996)customers ....” (Gamma 1996)

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CommodityChemicalsProducer

Key Suppliers Key Customer

Service Functions

Tangible Products Tangible Products

A Typical Marketing System Showing Product and Service Functions

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CommodityChemicalsProducer

Key Suppliers Key Customer

Service Functions

RelationshipManagement

Tangible Products Tangible Products

Telemetry Systems

A Typical Marketing System Showing Product and Service Elements

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ConclusionsConclusions

Commodities can be classified in the Commodities can be classified in the context of commodity chemicalscontext of commodity chemicals

Historical cost leadership strategies put Historical cost leadership strategies put little emphasis on servicelittle emphasis on service

Strong link between provision of services Strong link between provision of services and development of relationship marketingand development of relationship marketing

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cont.cont.

Key service attributes:Key service attributes:

* regular contact with customers* regular contact with customers

* order handling procedures* order handling procedures

* emergency response to accident and * emergency response to accident and preventionprevention

* technical information* technical information

* delivery on time* delivery on time

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cont.cont.

* credit terms* credit terms

* technical service and assistance* technical service and assistance

* JIT delivery procedures* JIT delivery procedures service is arguably the one and only service is arguably the one and only

differentiator in the commodity chemicals differentiator in the commodity chemicals sectorsector

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CommodityChemicalsProducer

Key Suppliers Key Customer

RelationshipManagement

Tangible Products Tangible Products

Telemetry

IntegratedProduct/Service(Servitisation)

An Integrated or Servitised System of Value and Relationships

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ImplicationsImplications

Firms seem to have recognised the Firms seem to have recognised the important of service in their augmented important of service in their augmented product offeringproduct offering

Responded in a variety of ways most Responded in a variety of ways most notably through relationship building notably through relationship building reducing distance between the partiesreducing distance between the parties

Service and relationship building used to Service and relationship building used to reduce transaction costsreduce transaction costs

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cont.cont.

Could be argued to be pursuing cost leadership Could be argued to be pursuing cost leadership strategy through a service differentiation routestrategy through a service differentiation route

Perhaps cost leadership and differentiation are not Perhaps cost leadership and differentiation are not mutually exclusivemutually exclusive

Service being used to escape from the “commodity Service being used to escape from the “commodity trap” by adding value to the core product over trap” by adding value to the core product over which they have little controlwhich they have little control

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cont.cont.

To break out from the “commodity trap” of blind To break out from the “commodity trap” of blind allegiance to cost leadership firms must seek allegiance to cost leadership firms must seek methods of differentiationmethods of differentiation

The nature of the product suggest that this is not The nature of the product suggest that this is not possible by manipulating the core product possible by manipulating the core product attributesattributes

Differentiation must be through the augmented Differentiation must be through the augmented product with service in the forefrontproduct with service in the forefront

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Relationship MarketingRelationship Marketing

Emerging from the Services literature and from the IMP Emerging from the Services literature and from the IMP Group Group

A ‘partnership’ between buyers and suppliersA ‘partnership’ between buyers and suppliers Creating networks and alliances to counter the vagaries of Creating networks and alliances to counter the vagaries of

marketsmarkets Trust, Commitment and Promise essential qualitiesTrust, Commitment and Promise essential qualities Aim is to reduce transaction costs and improve transactional Aim is to reduce transaction costs and improve transactional

valuesvalues Could be a way of breaking out of the commodity trap - Could be a way of breaking out of the commodity trap -

competing on ‘non-price‘ elements - capabilitiescompeting on ‘non-price‘ elements - capabilities

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Basis for Supplier Selection

Product/CommodityBased

Capability Based

AdversarialBuying PowerRelationships

Co-operativePartnership Type Relationships

Role Type

•Short Term Operational Emphasis•Price Quality Based•Multiple Sourcing

•Long Term Strategic•Capability Based•Competitive•Multiple Sourcing

•Non Price Based•Operational Emphasis•Management Assistance•Technical Assistance

•Strategic Emphasis•Single Sourcing•Continuous Improvement

Buyer-Supplier Role Type in Purchasing

Watts et al 1992

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Paradigm Shift ?Paradigm Shift ?

A move to compete on capabilitiesA move to compete on capabilities A move away from ‘transaction marketing’ A move away from ‘transaction marketing’

and towards ‘ relationship marketing’and towards ‘ relationship marketing’ Emphasis on the long term - from both Emphasis on the long term - from both

parties .... lots of advantagesparties .... lots of advantages To compete you have to embrace the new To compete you have to embrace the new

paradigm - fewer suppliers and an emphasis on paradigm - fewer suppliers and an emphasis on ‘key customers’ - remember the Pareto rule ! ‘key customers’ - remember the Pareto rule !

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Increasing Value - 1Increasing Value - 1

Increasing value to customers increases Increasing value to customers increases loyaltyloyalty

Find the value gap and fill itFind the value gap and fill it Manage the customer activity cycle – Manage the customer activity cycle –

Pre/During and Post activityPre/During and Post activity Lock-in rather than lock-on. Lock-on Lock-in rather than lock-on. Lock-on

customers are not captive.customers are not captive.

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Increasing Value -2Increasing Value -2

Traditional strategy built around market Traditional strategy built around market share leads to diminishing returnsshare leads to diminishing returns

Smart companies are increasing returns by Smart companies are increasing returns by defining ‘market space's and not sales of defining ‘market space's and not sales of discrete items.discrete items.

Co-operation leads to increasing value to Co-operation leads to increasing value to both parties with lower transactional costsboth parties with lower transactional costs

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Some referencesSome references

S Vandermerwe (2000) How increasing value to customers improves business results; Sloan Management Review, Fall, pp. 27-37.

D H McQuiston (2004) Successful branding of a commodity product: The case of RAEX Laser steel; Industrial Marketing Management, Vol. 33, pp. 345-354.

B Van Loo, R Diderdonck and P Gemmel (1998) Service Management: An Integrated Approach; Prentice Hall, see Chapter 3 on Servitization.

T Davenport (2005) The coming of Commoditization of Processes; Harvard Business Review, June.

J A S De Vasconcellos (1991) Key Success Factors in Marketing Mature Products; Industrial Marketing Management, Vol. 20, pp 263-278.