Product Diffrentiation

Chapter 5
Product Differentiation
Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall.
5-1
The Strategic Management Process

External Analysis Strategic Choice
Mission
Objectives
Strategy Implementation
Competitive Advantage
Internal Analysis
Business Level Strategy How to Position a Business in the Market?

Copyright 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive
Corporate Level Strategy

Which Businesses to Enter?
Advantage Barney & Hesterly
5-2 2
Business Level Strategies

Two Generic Business Level Strategies
Cost Leadership: generate economic value by having lower costs than competitors Example: Wal-Mart Product Differentiation: generate economic value by offering a product that customers prefer over competitors product Example: Harley-Davidson
5-3 3
A business level strategy intended to:
increase the perceived value of the focal firms products and/or services relative to the value of competitors products and/or services create a customer preference for the focal firms products and/or services
5-4 4
Bases of Differentiation
A base of differentiation must fill some customer need:
image hunger
comfort cleanliness beauty status style taste safety quality service
furthering a cause
reliability in use nostalgia
accuracy belonging
A differentiated product fills one or more needs better than the products of competitors
5-5 5
Almost anything can be a base of differentiation
the wide range of customer needs can be filled by a wide range of bases of differentiation tangible thing (product features, location, etc.) intangible concept (reputation, a cause, an ideal, etc.) limited only by managerial creativity Example: Fred Smith and FedEx
5-6 6
Three Categories
1) Product Attributes
exploiting the actual product

2) FirmCustomer Relationships exploiting relationships with customers 3) Firm Linkages exploiting relationships within the firm and/or relationships with other firms
5-7 7
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
5-8 8
Firm-Customer Relationships
Customization creating a unique diamond bracelet for a customer Consumer Marketing creating brand loyalty to a soap through image advertising Reputation sponsoring the local homeless shelter to engender positive community response
5-9 9
Firm Linkages
Linkages among Functions in the Firm using a circuit board designed in one division in other divisions Linkages with other Firms a sporting goods store sponsors a benefit race by donating running shoes and receives free radio advertising in return Product Mix a furniture store begins to sell home gym equipment, computers, and lawn mowers
5-10 10
Firm Linkages
Distribution Channels a doughnut shop begins to sell its doughnuts through gas stations Service and Support an oil change shop begins to offer pick up and delivery of cars in an office buildings parking garage
5-11 11
Competitive Advantage
A product differentiation strategy must meet the VRIO 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.

5-12 12
The Value of Product Differentiation

Neutralizing Threats
Toyota protected from Hyundai
Entry Chryslers Crossfire Industry Focal Firm Threat Allen Edmonds & Cole Hahn
Buyers
Rivalry
Ruths Chris Steak House
Suppliers
Substitutes
Home vs. Photo Shop Printing of Digital Pictures
5-13 13

Focal Firm with No Differentiated Product Pff Focal Firm with Differentiated Product MCff ATCind Pind Dind ATCff
Dff MRff
Qind
Qff
Above Normal Profits

5-14 14

Exploiting Industry-type Opportunities Fragmented Industry
Branding: commodity differentiated product Example: Kelloggs Corn Flakes
Emerging Industry
First mover advantages: captures market share Example: Motorola Cell Phones
5-15 15

Exploiting Industry-type Opportunities Mature Industry
Refining product or adding services Example: Fords emphasis on service
Declining Industry
Exploiting niches: serving those with strong needs Example: NEWT at the Royal Hawaiian
5-16 16

Exploiting Other Opportunities
Trends or Fads
spinners surf clothing
Social Causes
themed credit cards animal safe clothing
Government Policy
Toyota Prius airport x-ray machines
Economic Conditions
outplacement agencies check cashing services
5-17 17
Rareness of Product Differentiation

By definition, we assume rareness
if a product is differentiated, it is rare enough customer preferences are evidence of a differentiated product increased volume of purchases and/or a premium price
5-18 18
Imitability of Product Differentiation

Logic of costs of imitation
if would-be imitators face a cost disadvantage of imitation, they will rationally choose not to imitate
Sources of costs of imitation

historical uniqueness causal ambiguity social complexity
5-19 19

Product Features Easy Duplication of Bases Timing Usually Location Costly Reputation Links between functions Distribution Channels Service and Support
May be Costly
Product Mix Product complexity Links with other firms
Product customization Consumer marketing
5-20 20

Substitutes
some substitutes may be obvious some substitutes may not be obvious if no substitutes are obvious, then we would conclude that imitation through substitution will be costlyat least for the present time if a base of differentiation is valuable, others will attempt to imitate it through duplication and/or substitution
5-21 21
Organizing for Product Differentiation

Organizational Structure
U-Form with cross-functional teams
Management Controls
flexibility broad guidelines creativity encouraged
Compensation Policies
Reward: crossfunctional cooperation creativity risk taking
Example: Ford Taurus Cross-Functional Teams

5-22 22
Cost Leadership and Product Differentiation

Can a firm pursue both simultaneously?
No
use of structure, management control, and compensation policies are nearly opposites
Yes firms can do both because some bases of differentiation also lend themselves to low cost
structure, controls, & policies are not opposites
Example: Rolex
Example: Toyota
5-23 23
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 the VRIO criteria may generate competitive advantage a product differentiation strategy is only as good as its implementation
Product differentiation principles can be applied to your personal and professional lives.
5-24 24

Focal Firm with No Differentiated Product Pff Focal Firm with Differentiated Product MCff ATCind Pind Dind ATCff
Dff MRff
Qind
Qff
Above Normal Profits

5-25 25
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.
Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall

5-26 26

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Chapter 5

Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall.

The Strategic Management Process

Business Level Strategy How to Position a Business in the Market?

Corporate Level Strategy

Business Level Strategies

Advantage Barney & Hesterly

Advantage Barney & Hesterly

Advantage Barney & Hesterly

Advantage Barney & Hesterly

exploiting the actual product

Advantage Barney & Hesterly

Product Complexity multiple functions on a watch

Advantage Barney & Hesterly

Advantage Barney & Hesterly

Advantage Barney & Hesterly

Advantage Barney & Hesterly

if it is to create competitive advantage.

Advantage Barney & Hesterly

The Value of Product Differentiation

Ruths Chris Steak House

Home vs. Photo Shop Printing of Digital Pictures

Advantage Barney & Hesterly

The Value of Product Differentiation

Above Normal Profits

Advantage Barney & Hesterly

The Value of Product Differentiation

Advantage Barney & Hesterly

The Value of Product Differentiation

Advantage Barney & Hesterly

The Value of Product Differentiation

Rareness of Product Differentiation

Advantage Barney & Hesterly

Imitability of Product Differentiation

Sources of costs of imitation

Advantage Barney & Hesterly

Imitability of Product Differentiation

Product Mix Product complexity Links with other firms

Product customization Consumer marketing

Advantage Barney & Hesterly

Imitability of Product Differentiation

Advantage Barney & Hesterly

Organizing for Product Differentiation

Example: Ford Taurus Cross-Functional Teams

Advantage Barney & Hesterly

Cost Leadership and Product Differentiation

Advantage Barney & Hesterly

Advantage Barney & Hesterly

The Value of Product Differentiation

Above Normal Profits

Advantage Barney & Hesterly

Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall

Advantage Barney & Hesterly

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