Product Differentiation Chapter 5. Strategic Management & Competitive Advantage – Barney & Hesterly 2 Product Differentiation Copyright © 2006 Pearson

Product Product DifferentiationDifferentiation

Chapter 5Chapter 5

Strategic Management & Competitive Advantage – Barney & Hesterly 2

Product DifferentiationProduct Differentiation

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 22

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




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 Differentiation

A 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


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





Three 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





Firm Linkages

• Linkages among Functions in the Firm – using acircuit 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





Firm 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




The Value of Product Differentiation

Qind

Pff

Dff

MRff

ATCind

MCff

Pind Dind

ATCff

Qff

Focal Firm with No Differentiated Product

Focal Firm withDifferentiated Product

Above NormalProfitsRobinson, 1934 Chamberlin, 1933




Fragmented Industry

Branding: commodity differentiated product

Emerging Industry

First mover advantages: captures market share

Exploiting Industry-type Opportunities





Exploiting Industry-type Opportunities

Mature Industry

Refining product or adding services

Declining Industry

Exploiting niches: serving those with strong needs





Exploiting Other Opportunities

Trends or Fads

• spinners

• surf clothing

Government Policy

• Toyota Prius

• airport x-ray machines

Social Causes

• themed credit cards

• animal safe clothing

Economic Conditions• outplacement agencies

• check cashing services





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





Easy

May beCostly

UsuallyCostly

Duplicationof Bases

Product Features

Product Mix

Product complexity

Links with other firms

Product customization

Consumer marketing

Links between functions

TimingLocationReputation

Distribution ChannelsService and Support





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

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

• 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




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

Documents

Product Differentiation Chapter 5. Strategic Management & Competitive Advantage – Barney & Hesterly 2 Product Differentiation Copyright © 2006 Pearson