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Product Product DifferentiationDifferentiation
Chapter 5Chapter 5
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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?
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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
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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
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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
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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
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
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Bases of Differentiation
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
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Bases of Differentiation
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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Bases of Differentiation
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
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Bases of Differentiation
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
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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
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Fragmented Industry
Branding: commodity differentiated product
Emerging Industry
First mover advantages: captures market share
Exploiting Industry-type Opportunities
The Value of Product Differentiation
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Exploiting Industry-type Opportunities
Mature Industry
Refining product or adding services
Declining Industry
Exploiting niches: serving those with strong needs
The Value of Product Differentiation
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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
The Value of Product Differentiation
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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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Imitability of Product Differentiation
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
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Organizing for Product Differentiation
OrganizationalStructure
• U-Form with cross-functionalteams
ManagementControls
CompensationPolicies
• flexibility
• broad guidelines
• creativityencouraged
Reward:• cross-
functionalcooperation
• creativity
• risk taking
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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
• structure, controls, &policies are not opposites
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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
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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)
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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