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PRODUCT DIFFERENTIATION & PAPA JOHN’S CASE
STUDY
Student:
Lecturer :
Theory
Background
Facts
Key issues
Analysis
Course of action
Recommendation
Product Differentiation Product differentiation is a business level strategy in which firms attempt to create and exploit differences between their products and those offered by competitors. These differences may lead to competitive advantage if customers perceive the difference and have a preference for the difference. Of course, such differences will lead to competitive advantage only if the differences meet the VRIO criteria
Mission
Objectives
Internal Analysis External Analysis
StrategicChoice
Business Level Strategy
Corporate Level Strategy
Cost leadership
Product differentiation
Bases for Product Differentiation Definition Example
Attributes of the product or service
preferences are created by actual differences in the tangible product or service offered by the focal firm vis-à-vis competitors’ offerings
• product features• product complexity • timing of product introduction • location
Firm-Customer relationship preferences are created as the focal firm develops and exploits relationships with customers based on what the focal firm’s target customers want
• Product customization• Consumer marketing• Product reputation
Firm Linkages preferences are created as the focal firm combines the competencies of different functions within or across organizations to produce tangible and/or intangible differences between the focal firm’s offerings and those of competitors
• linkages among functions within the focal firm
• linkages with other firms• product mix• distribution channels• service and support
Bases for Product
Differentiation
Product Attributes
Firm-Customer
Relationship
Firm Linkages
The notion of a base of differentiation is important because it allows a firm to focus its efforts on creating and exploiting a particular difference between its products and competitors’ products. Managers need to understand their own bases of differentiation and the bases of differentiation of competitors so that they can make informed strategic choices
Valu
eabl
e Threat of entryThreat of rivalryThreat of substitutesThreat of suppliersThreat of buyers
Rare If the company
has established a differentiated product, which implies that the product is rare
Imita
bilit
y Easy to duplicate. Such as product featureMaybe costly to duplicate. Such as Product mix, links with other firm, product customizatio, product complexity, consumer marketingCostly to duplicate. Such as links between functions, timing, location, reputation ,distribution channels ,service and support
Org
aniz
ing . Organizational
structure, management control systems, and compensation policies can all be managed to encourage customers to have a preference for the focal firm’s products and/or services
Product differentiation can neutralize the threats of the forces mentioned in the Five Forces Model
If a product differentiation strategy is costly to imitate, the firm can reasonably expect to enjoy a competitive advantage.
Here are how the implementation of V-R-I O to Product Differentiation
CASE STUDY
Theory
Background
Facts
Key issues
Analysis
Course of action
Recommendation
Company Snapshot
Stores (2010 data)
% franchised
Public/Private
Headquarter
CEO
Employees
International
Internet Ordering
2007 Sales
3,646 612 company-owned 2,280 domestic franchise 754 international franchise
83%
Public
Louisville
John Schnatter
16,336
Yes
Yes
USD 504 million
• John Schnatter opened the first Papa John’s
in 1985
• Sold its first franchise in 1986
• Initial Public Offering on June 8,1993
• Opened its first international restaurant in
1998 through acquisition of “Perfect Pizza”
in UK.
• #1 in American Customer Satisfaction Index
from 1999-2008
US Pizza Industry
There are more than 65,000 pizza restaurants in the United States $36.286 billion worth of pizza was sold in the US in 2010 45% of pizza is ordered for carry out, 36% for delivery, and 20% for dine-in
The “Big 4” controls some 31% of the American pizza industry. But it is still the independent chains that make up the majority—51.66%–of all pizza sales in the United States
Type of Pizza• Traditional Crust Pizza: The crust is not too thick
and not too thin. Usually it is created by rolling the dough into a round circle then topping it with sauce and cheese.
Deep Dish Pizza: A thick crust and dense toppings usually characterize deep-dish pizza, also known as pan pizza.
New York Style Pizza: The crust of this pizza tends to be much thinner than traditional and deep dish.
Channels of Distribution• Sit-Down Dining - custom pizzas made for in-
restaurant diners• Typical Pizza Restaurant Establishments: Pizza Hut
Red Roofs, Independents • Delivery - custom pizzas made, baked and delivered
by restaurant personnel to call-in customers• Typical Pizza Restaurant Establishments: Domino’s
Pizza, Pizza Hut, Papa John’s • Carry Out - custom pizzas made and baked for walk-
in or call-in customers to pick up • Typical Pizza Restaurant Establishment: Little
Caesars• Take ‘N Bake - custom pizzas made for walk-in
customers who then take the pizza home to bake themselves at their own convenience• Typical Pizza Restaurant Establishment: Papa
Murphy’s
US Pizza Industry
Theory
Background
Facts
Key issues
Analysis
Course of action
Recommendation
Element Facts Year
Technology The first pizza company with online ordering & text messages ordering 2001 & 2007
Menu • Pan Pizza• Added desserts to their carryout & delivery menu and chocolate pastry delight
2006 & 2008
Company growth • High-quality pizza with side items. Proprietary blend of pizza (Menu)• Lower operating cost & efficient QC center (Efficient Operating System)• Training programs for corporate members & franchisee, performance-based financial
incentives (Commitment to Team Member Training and Development)• National advertising campaign, restaurant level-marketing, direct-mail, store-to-door
couponing, community oriented activities, cross marketing activities with third party companies, sponsorship (Marketing)
• Attract franchisee with experience in retail business and financial resources to open multiple location. Assistance in restaurant operations
2007
Cost Management
• Net property & equipment value $2 million & property lease $22.4 million. Leasing building space provide the flexibility to move locations quickly
• Leased the trailers used to distribute ingredients• Cheese contribbute appx 35-40% of food costs• Partnered with a third-party entity formed by franchisee, BIBO Commodities, Inc. To
reduce cheese price volatility
2007
Element Facts Year
Operational Support System
• Created Operation Support Service and Training (OSST) for training & development of team members
• Printing company for high-quality service
2007 & mid-90s
Community Affairs • Sport team sponsorships• College scholarships ($5 million)• National FFA, Cerebbral Palsy K.I.D.S Center, Children Miracle Network
Marketing Partnerships
• Coca-Cola (sole supplier in Papa John’s store)• Endorsement • Blockbuster Video (30-day trial of free Blockbuster Video online)
Up to 2011,
Industry • Pizza industry is a mature and saturated industry• Highly competitive, cost of entry was relatively low and produc
differentiation was difficult
“By using a combination of internal and external resources, Papa John’s was determined to not compete with its competition on price. Focusing on quality product, active participation in the local communities, and product branding enabled Papa John’s to hold its own with the other pizza chains” – excerpt from the case study
Theory
Background
Facts
Key issues
Analysis
Course of action
Recommendation
(in thousands, except per share data0 Year Ended
Dec. 30,
2007Dec. 30,
2006Dec. 25,
2005Dec. 26,
2004Dec. 28,
2003
Income Statement Data 52 weeks 53 weeks 52 weeks 52 weeks 52 weeks Domestic revenues: Company owned restaurant sales $ 504.330 $ 447.938 $ 434.525 $ 412.676 $ 416.049
Variable interest entities restaurant sales 7.131
7.359 11.713 14.337 -
Franchise royalties 55.285 56.374 52.289 50.292 49.851
Franchise dand development fees 4.758
2.597 3.026 2.475 1.475
Commissary sales 399.099 413.075 398.372 376.642 369.825 Other sales 61.820 50.505 50.474 53.117 48.541 International revenues:
Royalties and franchise and development fees 10.314 7.551 6.529 5.010 3.810
Restaurant and commissary sales 20.860 15.658 11.860 10.747 10.572 Total revenues 1.063.597 1.001.057 968.788 925.296 900.123 Operating income 52.047 97.955 72.700 36.632 55.353
Investment income 1.446
1.682 1.248 639 672
Interest expense (7.465) (3.480) (4.316) (5.313) (6.851)
Income from continuing operations before income taxes and cumulative effect of a change in accounting principle
46.028 96.157 69.632 31.958 49.174
Income tax expense (13.293) (33.171) (25.364)
(12.021)
(13.440)
Income from continuing operations before income taxes and cumulative effect of a change in accounting principle
32.735 62.986 44.268 19.937 35.734
Income from discontinued operations, net of tax - 389 1.788 3.134 3.242
Cumulative effect of accounting change, net of tax -
- - -
(413)
Net Income $ 32.735 $ 63.375 $ 46.056 $ 23.071 $ 38.563
Financial results:• Total revenue CAGR
was 4.3%• International Revenue
contributed the most of the average growth (21.3% )than Domestic Revenue (3.9%)
• Operating Income and Net income had been declining for the last 4 years on average by -1.5% and -4.0%
Stock performance:• The performance of overall F&B business has been very poor
compared to the overall growth in stock indices• Despite a better performance compared to its peer in the industry
(CAGR 10%)but Papa John’s stock also under-performing compared to the overall stock indices
• Meaning, Papa John’s investor would create more wealth investing in other company than pouring their money in Papa John’s
CAGR
CSRP total Returns IndexDes-02 Des-03 Des-04 Des-05 Des-06 Des-07 5
years4 years
Papa John's International, Inc 100,0 116,7 120,7 213,1 206,3 161,0 10,0% 8,4%
Nasdaq Stock Market (US Companies) 100,0 146,0 160,0 167,8 180,8 197,6 14,6% 7,9%
NASDAQ Stocks (SIC 5800-5899 US companies) 100,0 137,8 202,4 209,4 225,5 150,3 8,5% 2,2%
eating & drinking places
Stock performance:Papa John’s stock even performed terribly after 2007. Loosing its value from 2005 by 8% while the restaurant industry has grown 60% against 2005
Key Issues:• Papa John’s had enjoyed only incremental growth in the new century
(2000-present)• Schnatter wanted to see Papa John’s return to the days when it opened
200 to 300 stores a year• Restaurant analysts belived that pizza industry is a mature and
saturated industry• Despite the growth in revenue (especially from overseas) the company
experience declining operating income meaning that the operating expense has grown faster than the revenue
• 2010 stock performance compared to 2005 & 2007 showed that the company is destroying is shareholders wealth
• Learning from Papa John’s 2010 annual report, the company international operation suffered loss for several years
Theory
Background
Facts
Key issues
Analysis
Course of action
Recommendation
Value Chain Activity Value for Customer
Primary
Inbound logistic • Online sales account for USD 400 million (2007). Papa John’s revenue in 2007 was USD 1.063 billion
Operations Store located in prime areas supported by commissaries as its suppliers
Outbound logistic Use delivery van
Marketing & sales • National advertising campaign through television, print media, internet, store-to-door coupon, direct mail and in-store marketing
• Local communities sponsorship• CSR program in the form of scholarship• Pan Pizza proprietary & dessert
Service • Customer service available online and via telephone
Secondar
y
Procurement • BIBP Commodities procure the cheese for Papa Johns’s• 10 regional Commissaries supplies Papa John’s store nation wide
Technology development • Papa John’s use IT and text messages for customer order• Also use IT & mobile technologies for promotional services
Human resources management Papa John’s operates Operation Support Service and Training (OSST) for its human capital development
General adminsitration
Papa John’s Value Chain
V-R-I-O
Resources/Capabilities
Is it Valuable?
Is it Rare?
Costly to Imitate? Organizing
Inbound Logistic Yes No No
Operation Yes No No
Outbound Logistic Yes No No
Marketing Yes No No
Service Yes No No
Procurement Yes Yes No
Technology development Yes No No
HRM Yes No No
GA
V-R-I-O Analysis:• Papa John’s
Papa John’s value chain analysis using the V-R-I-O shows that actually the company does not have a strong competitive advantage against the competition thus lack the ability to create value.
Business Level Strategy
What is it?Action used by the firm to gain a competitive advantage by exploiting core competencies in specific product markets
• Papa John’s applies differentiation strategy as its business-level-strategy
• They reject the idea of competing in price
• Their focus is on customer experience with Pizza made out of better ingredients & prepared better thus the marketing slogan came about (Better Inggredients, Better Pizza)
What about the products? Do Papa John’s products own an
edge compared to its competitors?
Papa John’s products•Create your own pizza & specialty pizza •All pizzas are made from good quality dough (better ingredients)•Each pizza accompanied by special garlic sauce and 2 pepperoncinisPizza•Chicken wings, chicken strips, breadsticksSides•SoftdrinksDrinks•Applepie, cinnapieDesserts•Dipping sauces, pepperoncinis, parmesan cheese, crushed red pepperExtras
V-R-I-O
Products Is it Valuable?
Is it Rare?
Costly to Imitate? Organizing Conclusion
Pizza Yes Yes No Yes Despite its rarity, Papa John’s pizza is not costly to imitate
Sides Yes No No Yes Papa John’s side dishes can be found anywhere else
Drinks Yes No No Yes No differentiation at all
Desserts Yes Yes No YesThe dessert is quite rare but not costly to imitate and the variation is not enough
Extras No Yes No YesRare but not too valuable as they’re considered to be “extras” & cannot produce too much value
Despite its Pizza uniqueness, Papa John’s products are not unique enough to be considered sustainable
And how do the valuable activities stand on the scale?
Are they rated high?
Likert Scale
Valuable Activities Scale 0-3 Reason
Commissaries/Centralized quality control
2 Having a regionalized commissaries allow the company to control its stock low (not having too much stock per store), maintain quality control
Operation Support Service Training (OSST)
1Nowadays, a training center for franchisee and staffs are very common in the industry thus having OSST does not mean give too much edge for the company. But the existence is definitely necessary
BIBP Commodities, Inc3
This is very important for the company since cheese is one of the main ingredients for Pizza and in the case of price increase the company cannot immidiately raise their prices thus having a stable purchasing price of cheese is necessary. And not many companies have this
Internet & mobile technology 1
Papa John’s is one of the pizza company that generates 80% of its sales through internet or mobile technologies but this technology is not distinctive and already applied by other companies in the industry
Pan Pizza, Dessert3
The pizzas are not sold cheaper than its competitor because Papa John’s uses better ingredients and prepared the dough seriously. Despite its quality, the menu or taste is somewhat similar to any pizza available in the market
Franchise system 1 Franchise has contributed to the firm expansion but the system itself is very common and has beem practiced by so many players
Conclusion on the Analysis
• Papa John’s Key valuable activities are not considered to be distinctive or special thus the company does not have a sustainable competitive advantage
• Despite the uniqueness of the products itself (better ingredients, better pizza), the startegy seems to be not to costly to duplicate
• The firm implement its strategy by doing 2 major activities:• Focus on product quality (Better Ingredients, Better Pizza)• Marketing Campaign through advertising, publicity, etc• Expanding through franchise and expanding internationally
• Its international strategy seems not to work out very well. The number showed that the international business experienced loss for several consecutive years
Theory
Background
Facts
Key issues
Analysis
Course of action
Recommendation
Determine the threats
Determine the industry
• MatureType of industry
•Earnings and sales grow slower in mature industries than in growth and emerging industries•earnings may be stable, growth prospects are few and far between
Characteristic
•The company can differentiate established products by “refining” the product - new and improved•Or differentiate by offering new levels of service to accompany the product
What can the company do?
Is the product rare?
The answer to the question of rareness can safely be assumed at this point in the analysis. The assumption is that Papa John’s must establish a differentiated product, which implies that the product is rare
What about to cost to imitate?
If a product differentiation strategy is costly to imitate, the company can reasonably expect to enjoy a competitive advantage.
Cost to imitate? Strategy Reason
Easy Product features
May be costly to imitate • Product mix• Links with other firms• Product customization• Product complexity• Consumer marketing
Usually costly to imitate • Links between functions• Timing• Location• Reputation• Distribution channels• Service and support
Key points for Papa John’s consideration
• Papa John’s weaknesses in the industry are: the business does not have a difficult barrier to enter. Anyone can open a pizza joint and being a food industry meaning that customers have a lot of choice of substitutes in the market
• The industry itself is mature meaning that in order to have an edge, the company must differentiate its level of services and refine its existing products
• In order to have a product which is costly to imitate than Papa John’s must improve its link between functions, build brand reputation, conduct innovation in its distribution channels and service support
Background
Facts
Key issues
Analysis
Course of action
Recommendation
Let’s revisit Schnatter goals
Opening 200-300 stores per
year
4,000 stores in 5 year from
2007
6,000-7,000 worldwide
Reduce company-run
stores
Ensure steady stream of revenue
despite difficult environment
How the firm plan to bring about?
Internationa
l Expansion
•Partner with local producer•Franchise•Accomodate sit-down dining areGrow &
Maintain domestic markets
•Co-branding effortsDive
rsification
•Develop or acquire additional restaurant chain
Papa John’s sets-out these strategy to achieve its goals (stated previously)
Goals Critics Advise
International Expansion
Despite its experience in international market, the opportunity looks very promising but the company will have to sacrifice its identity as a carry-out & delivery pizza restaurant
• The company should maintain its core values of producing quality pizza at a premium price and its business model which is a carry-out & delivery
• Despite the lure of international opportunity, the company should refrain from going into asian market since the characteristic are very much different. Other option would be to focus on North America (Canada & Mexico) which share resemblance
Maintain domestic market
Reducing company-run store would turn disastrous because the company will lose its sense of the business.
• The company should maintain a healthy ratio between company-run & franchisee store because it needs to make sure that the franchisee business remain profitable
• Co-branding with renown brand
New business (acquisition or development)
• Acquisition, based on various studies often failed because the differences in the culture and over-pricing the value of acquiree
• If the business is totally different from Pizza business then the company needs to acquire new knowledge in the new industry
• Acquisition can be done for expansion to international market. By acquiring brand that already established in the international market. It can be a pizza restaurant or any restaurant business
Critics to Company’s Goals
Strategy Implementation ExampleNew & improved products • Pizza with high quality inggredients,
imported inggredients• New line of esserts• Italian beverages• Health concious
• Original Pizza, the one that originates from Italy
• Chocolate melted, tiramisu cake, cheese cake
• Cappucinno, lattes• Products which contains low calorie,
fresh ingredients & healthy
New level of service and support Catering services For private parties or birthday party
Links between functions Store expansion through tripartite (Bank, the company & franchisee)
Using the company’s guarantee, help franchisee expand their business through stores opening
Location Expand to Canada & Mexico. Market that resembles US.
Open new franchise
Distribution channels Modern outlet (supermarket) Sell “create your own pizza” and “ready to make pizza” in supermarkets
Reputation Health conciuous, not only better Pizza Marketing campaign that focus on healthier Pizza, not only better
Business-Level Strategy Recommendation
Strategy Implementation ReasonOrganizational Structure • U-form
• Not too many layers• Profit oriented regional business area
Eash business manager, must be responsible for the profitability of their respective area. Not only that, they also must have the knowledge to expand their business locally
Management Controls • KPIs not only based on financial indicators but also on business growth & innovation
The main idea behind using management controls in the implementation of a product differentiation strategy is that of flexibility. Not only must managers and employees have the freedom to be flexible, they should also be encouraged to be creative and adaptable
Compensation Policies • Rewards for successful experimentation
• Absence of punishment for failed experimentation provide strong incentive to be creative
Compensation policies should be structured to reward managers and employees for cooperating within cross functional teams and being creative in the process
Business-Level Strategy Recommendation
The Organization question of the VRIO Model is perhaps even more important with a product differentiation strategy because of the relationship between the company and customers
THANK YOU
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