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Products' DifferentiationPolicy
MONOPOLISTIC COMPETITION
A market structure characterized by many firms selling differentiated products in an industry in which there is free entry and exit.
Characteristics of monopolistic competition:
1.Product differentiation
2.Many firms
3.Free entry and exit in the long run
4. Independent decision making
5.Market Power
6.Buyers and Sellers have perfect information
EXAMPLES OF MONOPOLISTIC COMPETITION
Banks Sporting Goods
Radio Stations Fish and Seafood
Clothing Jewellery
Computers Health Spas
Frozen Foods Apparel Stores
Canned Goods Convenience Stores
Product Differentiation - A Definition
Product (or service) differentiation is business level strategy intended to:
Increase the perceived value of firm’s products(or services) compared to competitor’s products (or services)
Create a customer preference for firm’s products/services
Characteristics Of Product Differentiation
Each firm produces a product that is slightly different
from those of other firms
Rather than being a price taker, each firm faces a
downward-sloping demand curve
Close substitutes but no perfect substitutes
An attempt to increase price will normally results in a
lower volume sold
Product differentiation
The differences in the product may be of-
1.Product Quality
2.Services
3.Location
4.Advertisement and Packaging.
Product Quality:
Product Differentiation can take place in the form of physical or in the form of qualitative differences. Differences in functional features, materials, design
Example : economics text books
Services:
Services associated with product
Example: home delivery
Location:
Depending on the location or accessibility, products may also be differentiated
Example: grocery stores and super markets, fuel stations on highways.
Advertisement and Packaging:
Standard of advertisement, the use of brand names, trademarks and the type of packaging have the power to differentiate a product from other.
Examples: Ariel and Surf
A Base of Differentiation must fill some customer need
Basis of Differentiation Almost anything can be a basis of
differentiation: The wide range of customer needs can be
filled by a wide range of basis of differentiation Tangible thing (product features, location, etc.) Intangible concept (reputation, a cause, an ideal,
etc.) Limited only by managerial creativity.
Example: Fred Smith
FedEx10
Horizontal Differentiation• Products vary in certain product characteristics to appeal
to distinct consumer groups.
• Horizontal differentiation can be linked to differentiation in colours (different colour version for the same good), in styles (e.g. modern / antique), in tastes.
Eg. the ice-cream offered in different tastes. Chocolate is not "better" than lemon.
The supplier of many versions decides a unique price for all of them. Eg. Chocolate ice-creams cost as much as lemon ones.
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Vertical Differentiation Vertically differentiated products differ in quality.
Here goods present can be ordered according to their objective quality and be ranked from the highest to the lowest. We can say here that one good is "better" than another.
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When evaluating a real market, a good starting point is a top-down grid of interpretation, we shall present first in 3 segments.
Class Price Crucial feature
LowLow
The price is low, the product simply works
MiddleMiddle
Use of the good is comfortable. Most people use it. Mass market brand
HighHigh
Quality, exclusivity, durability (= low life-long price)
To this basic classification, one should add two
intermediate classes:
Two extreme classes should finally be added:
Class Price Crucial feature
Middle-lowLow
The cheapest nation-wide brand
Middle-highMiddle
The cheapest product of high quality
Class Price Crucial feature
Extremely lowVery Low
It usually does not work, it does not last, and it has important defects
Extremely HighVery high
Exclusivity, non practical, status symbol
Mixed Differentiation Complex markets are characterized both by horizontal and vertical differentiation. Eg, apparel, garments and shoes have a rich combination of shapes, colours, materials, complementarities, style etc. Here, the quality of the materials can often be seen as a vertical differentiation but shape would be horizontal.
Basis of Differentiation
1) Product Attributes
2) Firm-Customer Relationships
3) Firm Linkages
• exploiting the actual product
• exploiting relationships with customers
•exploiting relationships within the firmand/or relationships with other firms
Basis of Differentiation
Product Attributes
1)Product Features
The shape of the product (VAIO)
2)Product Complexity
Multiple features on a cell-phone (Smartphone's)
3)Timing of Introduction
Being first to market (Sony Walkman ,I-Pod)
4)Location
Locating next to a freeway exit (Motorway exit)
Basis of Differentiation Firm-Customer Relationships
1)Customization
Creating a unique product for a customer
(DELL,BMW)
2)Consumer Marketing
Creating brand loyalty
3)Reputation
Creating reputation for brand
Basis of Differentiation Firm Linkages
1)Linkages among functions in the firm Using circuit board designed in one division in another
division2)Linkages With Other Firms
A sporting goods store sponsors a benefit race by donating running shoes and receives free radio advertising in return
3)Product Mix Offering extended product mix to attract customers
4)Distribution Channels Selling own products/service via different distribution
channels5)Co branding
Starbucks inside a Barnes and Noble store
COMPETITIVE ADVANTAGE
A product differentiation strategy must meet theVRIO criteria…
Is it Valuable?
Is it Rare?
Is it costly to Imitate?
Is the firm Organized to exploit it?
…if it is to create competitive advantage.
‣Middle class car‣Versatile‣Economic
‣High pricing‣Status & styling‣Intelligent engineering
‣New technology and innovation‣Durability‣Quality
DEMAND CURVE FOR A MONOPOLISTIC COMPETITIVE
FIRM
OUTPUT
Price and marginal revenue
Demand and price
Marginal revenue
Thank You! ^^
In case if the internet is connected:http://www.investopedia.com/terms/p/product_differentiation.asp
