Product Differentiation Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management…

Product Product DifferentiationDifferentiation

Copyright © 2006 Pearson Prentice Hall. All rights reserved. Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney & HesterlyStrategic Management & Competitive Advantage - Barney & Hesterly 5-5-11

Chapter 5Chapter 5

Strategic Management & Competitive Advantage – Barney & Hesterly 2

Product DifferentiationProduct Differentiation


Mission Objectives

ExternalAnalysis

InternalAnalysis

StrategicChoice

StrategyImplementation

CompetitiveAdvantage

The Strategic Management Process

Business LevelStrategy

Corporate LevelStrategy

How to Position aBusiness

in the Market?

Which Businessesto Enter?




Business Level Strategies

Two Generic Business Level Strategies

Cost Leadership:

• generate economic value by having lower coststhan competitors

Product Differentiation:

• generate economic value by offering a productthat customers prefer over competitors’ product

Example: Wal-Mart

Example: Harley-Davidson




Product Differentiation

A business level strategy intended to:

• increase the perceived value of the focalfirm’s products and/or services relativeto the value of competitor’s products and/orservices

• create a customer preference for the focal firm’sproducts and/or services




Bases of DifferentiationA base of differentiation must fill somecustomer need:

• image• status

• comfort• taste

• beauty

• style

• furthering a cause• reliability in use

• safety

• nostalgia

• cleanliness

• service• quality

• accuracy

• hunger

• belonging

A differentiated product fills one or more needsbetter than the products of competitors




Almost anything can be a base of differentiation

• tangible thing (product features, location, etc.)

• intangible concept (reputation, a cause, an ideal, etc.)

• limited only by managerial creativity

Bases of Differentiation

• the wide range of customer needs can be filledby a wide range of bases of differentiation

Example: Fred Smith and FedEx




Bases of DifferentiationThree Categories

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





Product Attributes

• Product Features – the shape of a golf club head

• Product Complexity – multiple functions on a watch

• Timing of Introduction – being the first to market

• Location – locating next to a freeway exit





Firm-Customer Relationships

• Customization – creating a unique diamond braceletfor a customer

• Consumer Marketing – creating brand loyalty to a soapthrough image advertising

• Reputation – sponsoring the local homeless shelterto engender positive community response




Bases of DifferentiationFirm Linkages• Linkages among Functions in the Firm – using a

circuit board designed in one division in otherdivisions

• Linkages with other Firms – a sporting goods storesponsors a benefit race by donating running shoesand receives free radio advertising in return

• Product Mix – a furniture store begins to sellhome gym equipment, computers, and lawn mowers




Bases of DifferentiationFirm Linkages

• Distribution Channels – a doughnut shop begins tosell its doughnuts through gas stations

• Service and Support – an oil change shop beginsto offer pick up and delivery of cars in an office building’s parking garage




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.




Fragmented Industry

Branding: commodity differentiated product

Example: Kellogg’s Corn Flakes

Emerging Industry

First mover advantages: captures market share

Example: Motorola Cell Phones

Exploiting Industry-type Opportunities

The Value of Product Differentiation




Exploiting Industry-type Opportunities

Mature Industry

Refining product or adding services

Example: Ford’s emphasis on service

Declining Industry

Exploiting niches: serving those with strong needs

Example: NEWT at the Royal Hawaiian

The Value of Product Differentiation




Rareness of Product Differentiation

By definition, we assume rareness

• if a product is differentiated, it is rareenough

• customer preferences are evidence of a differentiated product

• increased volume of purchases

• and/or a premium price




Imitability of Product Differentiation

Logic of costs of imitation

• if would-be imitators face a cost disadvantageof imitation, they will rationally choose not toimitate

• historical uniqueness

Sources of costs of imitation

• causal ambiguity

• social complexity




Imitability of Product Differentiation

Substitutes

• some substitutes may be obvious

• some substitutes may not be obvious

• if no substitutes are obvious, then we wouldconclude that imitation through substitutionwill be costly—at least for the present time

• if a base of differentiation is valuable, otherswill attempt to imitate it through duplicationand/or substitution




Organizing for Product Differentiation

Example: Ford Taurus Cross-Functional Teams

OrganizationalStructure

• U-Form with cross-functionalteams

ManagementControls

CompensationPolicies

• flexibility

• broad guidelines

• creativityencouraged

Reward:• cross-

functionalcooperation

• creativity

• risk taking




Cost Leadership and Product Differentiation

Can a firm pursue both simultaneously?

No Yes

• use of structure,management control,and compensationpolicies are nearlyopposites

• firms can do bothbecause some basesof differentiation alsolend themselves to low cost

Example: ToyotaExample: Rolex

• structure, controls, &policies are not opposites




Implementing Differentiation Internationally

Global Multi-Domestic

• standardized product

• little variance in tastes & preferences

• centralized control

• focused on efficiency

• non-standard product

• high variance intastes & preferences

• decentralized control

• focused on satisfyingtastes & preferences

Example: Sony Example: Siemens




Implementing Differentiation Internationally

Business-level and International Expansion Strategies

Generally, but not always…

• structure, control, & compensation policies are similar as follows:

Cost leadership

Product differentiation

Global

Multi-domestic

(international integration, efficiency)

(local responsiveness)




Summary

• product differentiation creates customer preferences

• preferences allow firms to make above normal profits

• almost anything can be a base of differentiation

• bases of product differentiation that meet theVRIO criteria may generate competitive advantage

• a product differentiation strategy is only as goodas its implementation

Product differentiation principles can be applied to your personal and professional lives.

Documents

Product Differentiation Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management…