product differentiation copyright © 2012 pearson education, inc. publishing as prentice hall. 5-1...

Product Product DifferentiationDifferentiation

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. 5-5-11

Chapter 5Chapter 5

Strategic Management & Competitive Advantage – Barney & Hesterly 2

Product DifferentiationProduct Differentiation

Copyright © 2012 Pearson Prentice Hall. All rights reserved. Copyright © 2012 Pearson Prentice Hall. All rights reserved. 5-5-22

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

Example: Wal-Mart

Example: Harley-Davidson




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.




Bases of Differentiation

A base of differentiation must fill somecustomer need:

• image

• status

• comfort

• taste

• beauty

• style

• furthering a cause

• reliability in use

• safety

• cleanliness

• service

• quality

• accuracy

• hunger

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

Example: Fred Smith and FedEx





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• preferences are created by actual differences in the

tangible product or service offered by the focal firm vis-à-vis competitors’ offerings

• product features (Arm & Hammer’s baking soda toothpaste)• product complexity (new digital cameras compared to single use film

cameras)• timing of product introduction (release of movies during the Holiday

and Summer seasons)• location (Chevron’s company-owned, combined c-stores & gas

stations are situated in prime traffic locations)





• Firm-Customer Relationships• 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 (Ford Motor Company’s combination of auto manufacturing and financing)

• linkages with other firms (Mattel toys in McDonald’s Happy Meals)• product mix (Cisco’s wide range of Internet technology products)• distribution channels (Coke & Pepsi vending machines)• service and support (Lexus service)





• Firm Linkages• 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 (Dell Computers-customers get exactly the features desired)

• consumer marketing (Mountain Dew-changed the image of the product through marketing-product stayed the same)

• product reputation (Harley-Davidson Motorcycles-reputation is so strong that some people tattoo the logo on their bodies)




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.




The Value of Product Different

• Neutralizing Threats • how product differentiation can neutralize the

threats of the forces mentioned in the Five Forces Model along with an example of each one. If the focal firm’s product differentiation strategy is effective:





• Threat of Entry• would-be entrants face the costs of overcoming

customers’ preferences for the focal firm’s products and/or services

• Example: Toyota was protected from Hyundai’s entry into the U.S. market because Hyundai had to enter at a low price and advertise heavily to attract customers away from Toyota’s well-established Corolla.





• Threat of Rivalry

• customers have, to some extent, segmented themselves based on their preferences for the products of the several competing firms in a market. Thus, the rivalry is generally lower among firms competing in a market of differentiated products.





• Threat of Substitutes

• customers will find the focal firm’s products and services substantially more attractive than substitute products (i.e., customers are less inclined to even try the substitute product and the focal firm is therefore insulated from the threat of the substitute)





• Threat of Suppliers• the power of suppliers may be mitigated in two ways.

First, the focal firm will likely be able to pass supplier price increases along to customers who have a preference for the focal firm’s differentiated product (customers with a preference for a differentiated product tend not to be price sensitive). Second, a firm that enjoys the strong preference of customers will usually have more bargaining power with suppliers compared to competitors that do not have differentiated products and services.





• Threat of Buyers• the power of buyers is reduced because the

focal firm enjoys a quasi-monopoly. By definition, if a firm has a highly differentiated product, then the firm is the only firm in that market that can offer that particular product. Customers with a preference for the focal firm’s products and services must buy from the focal firm, thus reducing the power of buyers.




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





Exploiting Other Opportunities

Trends or Fads

• 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





• Easy to Duplicate

• Product Features

• are easy for competitors to observe

• unless there is a patent, competitors face little cost in imitation

• may lead to temporary competitive advantage until competitors are able to imitate





• May be Costly to Duplicate• Product mix

• Links with other firms

• Product customization

• Product complexity

• Consumer marketing

• these bases all entail a relationship and/or the need for coordination• if any of these relationships and/or coordination efforts are marked

by unique historical circumstances, causal ambiguity, or more likely, social complexity, then it may be costly for other firms to imitate these relationships





• Usually Costly to Duplicate• Links between functions

• Timing

• Location

• Reputation

• Distribution channels

• Service and support• all have the common element of uniqueness in some way, most of the time (specific

linkages can exist only in the focal firm, there is only one ‘first mover’, there is only one of a prime location, there is only one firm reputation, etc.)

• in many cases, it would be impossible for a competitor to duplicate the base of differentiation

• links, reputation, distribution channels, and service and support all depend on relationships





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

• structure, controls, &policies are not opposites




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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

product differentiation copyright © 2012 pearson education, inc. publishing as prentice hall. 5-1...

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