School of Business and Economics

Strategic Management Day 3Product DifferentationDecember 11th, 2014

School of Business and Economics

Business Level StrategiesCost Leadership:

• generate economic value by having lower coststhan competitors

Product Differentiation:

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

Example: Ryan Air

Example: Turkish Airlines

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Bases of Differentiation

• image

• status

• comfort

• taste

• beauty

• style

• furthering a cause

• reliability in use

• safety

• nostalgia

• cleanliness

• service

• quality

• accuracy

• hunger

• belonging

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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

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Bases of Differentiation

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

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Product Attributes

• Product Features – the design of a phone

• Product Complexity – multiple functions on a watch

• Timing of Introduction – being the first to market

• Location – gas stations at a highway

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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

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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

• 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

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The Value of Product Differentiation

• Neutralizing Threats• Exploiting Opportunities

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The Value of Product Differentiation

Pff

D

MR

MC

ATC

Qff

Focal Firm withDifferentiated Product

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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

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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

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Imitability of Product Differentiation

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

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Product differentation and Duplication Coast

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Generic competitive strategies competitive advantage

lower cost differentiation

broad target

cost

leadership

differentiation

narrow target

cost focus

differentiation

focus

com

peti

tive s

cop

e

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Porter’s “Stuck in the Middle”

Profit

Successful Differentation

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Risks of generic strategies

cost leadership differentation focus

not sustained,

- imitators

- technology changes

- other bases for costs

not sustained,

- imitators

- differentation base

erodes

not sustained,

- imitators

- structure erodes

- demand disappears

proximity in

differentation is lost

cost proximity is lost - segment is not

distinguishable

- economies of scope

increase

cost focuser achieve

even lower costs in

segments

differentation focuser

achieve even greater

differentation in

segments

new focusers

subsegment the

industrt

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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