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TRUE/FALSE. Write'T'if the statement is true and'F'if the statement is false.1) Wal-Mart exemplifies a firm pursuing a product differentiation strategy

while Victoria's Secret exemplifies a firm pursuing a cost leadershipstrategy.

2) Product differentiation is a business strategy whereby firms attempt togain a competitive advantage by increasing the perceived value of theirproducts and services relative to the perceived value of other firms'products or services.

3) Attempts to create differences in the relative perceived value of a firm'sproducts or services are rarely made by altering the objective propertiesof those products or services.

4) While firms often alter the objective properties of their products orservices in order to implement a product differentiation strategy, theexistence of product differentiation is always a matter of customerperception.

5) If products or services are perceived as being different in a way that isvalued by customers, even if there is no physical differentiation, thenproduct differentiation exists.

6) A hedonic price is that part of a products' or services' actual price that isnot attributable to a particular attribute of that product or service.

7) Chryslers'introduction of the "cab forward" design was an attempt atdifferentiation through product features.

8) To the extent that differences in product complexity lead customers toconclude that the products of some firms are more valuable than theproduct of other firms, then product complexity can be a basis ofproduct differentiation.

9) Timing-based product differentiation relies solely on being a firstmover.

10) The physical location of a firm cannot be a source of productdifferentiation.

11) Products can be differentiated by the extent to which they arecustomized for particular customer applications.

12) Through advertising and other consumer marketing efforts, firmsattempt to alter the perceptions of current and potential customers, butonly when specific attributes of a firm's products or services are altered.

13) Once developed, a firm's reputation can last a long time, even if thebasis for that reputation no longer exists.

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14) The ability to use organization structure to facilitate coordinationamong scientific disciplines to conduct research is known asarchitecfu ral competence.

15) When firms place their products in movie+ this is known asco-branding.

16) In the information technology business, inter-connectivity is a relatively L6)unimportant basis of potential product differentiation.

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17) Product differentiation is ultimately an expression of the creativity ofindividuals and groups within firms and is limited only by theopportunities that exist, or that can be created in a particular industryand by the willingness and ability of firms to creatively explore ways totake advantage of those opportunities.

18) It is reasonable to expect that in the near future a marketing specialistwill develop a definitive list of bases of product differentiation.

19) Firms selling differentiated products face a horizontal demand curve.

Edward Chamberlin described firms selling differentiated products andfacing a downward-sloping demand curve as being in an industrycharacterized by monopolistic competition.

Product differentiation helps reduce the threat of new entry by forcingpotential entrants to an industry to absorb not only the standard costs ofbeginning business but also the additional costs associated withovercoming incumbent firms' product differentiation advantages.

Product differentiation effectively reduces rivalry to zero.

Product differentiation increases the threat of substitutes by making afirm's current products appear less attractive than substitutes.

Firms with highly differentiated products may have loyal customers, orcustomers who are unable to purchase similar products or services fromother firms and are therefore more likely to accept increased prices dueto a firm passing on increased costs by a powerful supplier.

When a firm sells a highly differentiated product, it enjoys aquasi-monopoly in that segment of the market.

In fragmented industries firms can use product differentiation to helpconsolidate a market.

18)

1e)

20)

2r)

22)

23)

24)

22)

23)

24)

25)

26)

25)

26)

2nF27) In emerging industries, product differentiation efforts often focus onproduct refinement as a basis for product differentiation.

28) The concept of product differentiation generally assumes that the partar waynumber of firms that have been able to differentiate their products in a icul is, at

-Tlnless

than thenumberof firmsneededtogenerateperfectcompetitiondynamics.

29) Firms that pursue a product differentiation strategy can choose whetheror not they want to rqveal this strategic choice to their competition byadjusting their prices.

30) Knowing how a firm is differentiating its products necessarily meansthat competitors will be able to duplicate a firm's product differentiationstrategy at a lower cost.

31) Product features as a basis for product differentiation are generally noteasy to duplicate.

32) While product features, by themselves, are usually not a source ofsustained competitive advantage, they can be a source of a temporarycompetitive advantage.

33) Product features, product customizatiorL and product complexity havefew obvious close substitutes and may be sources of sustainedcompetitive advantages.

34) Timing, location, distribution channels, and service and support are allvery similar bases of product differentiation and can act as substitutesfor each other.

35) While the U-form structure for a firm pursuing cost leadership isrelatively simple, the U-form structure for a firm implementing aproduct differentiation strategy can be somewhat more complex.

36) Firms pursuing a differentiation strategy often use temporarycross-divisional and cross-functional teams to manage the developmentand implementation of new, innovative and highly differentiatedproducts.

37) More recent work contradicts Porter's assertion about being "stuck inthe middle" and suggests that firms that are successful in both costleadership and product differentiation can often expect to gain asustained competitive advantage.

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32)

33)

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McDonald's is an excellent example of a firm that simultaneouslyemploys both a product differentiation and a cost leadership strategysince their product differentiation based on cleanliness, consistency andfun in its fast food outlets allowed the company to become the marketshare leader in the industry and to reduce its costs.

Firms that emphasize local responsiveness are often best able to realizethe full value of economies of scope and scale as compared to those thathave better cross-border integration.

40) To manage component manufacturing successfully, most intemationallyintegrated consumer electronics firms have located their componentoperations in technologically advanced countries like |apan and theUnited States.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement oranswers the question.

41) _is a business strategy whereby firms attempt to gain acompetitive advantage by increasing the perceived value of theirproducts or services relative to the perceived value of other firms'

4t)

products or services.reC) Cost leadership

a\ By increasing the perceived value of a firm's products or services, a firmwill be able to

A) gain significantly more market share than firms pursuing a costleadership strategy.

C) charge a lower price than it would otherr,rzise be able to do.D) sell their products at lower prices than firms pursuing a cost

leadership strategy.

43) \Alhile firms often alter the of their products or services inorder to implement a product differentiation strategy, the existence ofproduct differentiation, in the end is always a matter of

_.

38)

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A) fair market value.C) margin price.

B) Best-cost providerD) Related diversification

@D) altmistic price.

42)

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*rYM) If anindividual is considering purchasing a Toyota Camry or a Ferrariand decides that it is worth paying the extra money for the prestige thatis associated with the Ferrari, the additional money the customer iswilling to pay for the prestige is know as a(n)

45) The most obvious way that firms can try to differentiate their productsis by

A) customizing the product for a particular segment.B) making the product more complex.

A) objective properties; price

D) customer perceptions; price

4s)

c)D) introducing the product at the right time.

46) Which of the following bases of product differentiation attempts tocreate the perception that a firm's products or services are unusuallyvaluable by focusing directly on the attributes of the products or

ices a firm sells?B) Product customizationD) Consumer marketing

47) The ability of companies that produce complex software packages totailor these packages to the specific needs of their customers is anexample of product differentiation through

A) timing.C) complexity.

48) A firm's is really no more than a socially complex relationshipbetween a firm and its customers and can serve as a basis for productdifferentiation.

46)

L48)49) Which of the following bases of product differentiation attempts to

create the perception that a firm's products or services are unusuallyvaluable by focusing on the relationship between a firm and itscustomers?

A) LocationC) Product complexity

A) locationC) architectural competence

@C) Cross functional linking

A) Reputationffi_ryffi#effi

A) Reputation@s

@ffmwD) consumer marketing

@D) Linkages between functions

B) Organizational coordinationD) Managerial leverage

B) Consumer marketingD) Product complexity

B) Product mixD) Architectural competence.

s0) D50) Through which bases of competitive advantage do firms attempt to alterthe perceptions of current and potential customers, whether or notspecific attributes of a firm's products or services are altered?

A) ReputationC) Location

51) _

is the ability to use organizational structure to facilitatecoordination among specific disciplines to conduct research.

52) \Alhich of the following bases of product differentiation attempts tocreate the perception that a firm's products or services are unusuallyvaluable by focusing on links within and between firms?

53) When the television show American Idol shows the judges drinkingbeverages from cups with the Coca-Cola label, or when a corporatesponsor places its logo on a NASCAR car, this is an attempt at productdifferentiation by linking with other firms through

C) Reputation

B) Product customization

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s3)

754) Product differentiation is ultimately an expression of the _

ofindividuals and groups within firms and is limited only by thethat exist, or that can be created in a particular industry.

A) resources; opportunitiesC) opportunities; resources

In generaf firms selling differentiated products face a demand curvethat is

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wia.wa'I.*[twpwC) upward sloping.

B) vertical.D) horizontal.

56) According to Chamberlirg firms selling differentiated products andfacing a down-ward sloping demand curve are in an industry describedas

semi-structured competition.perfect competition.

57) Which of the following statements regarding the impact of productdifferentiation on the threat of new entry is accurate?

A) Product differentiation increases the threat of new entry byallowing potential new entrants to avoid costs associated withovercoming incumbent firms' product differentiation advantages.

B) Product differentiation has no impact on the threat of new entry.C) It is not possible to determine the impact of product differentiation

on the threat of new entry.

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58) When considering the impact of product differentiation on the threat ofrivalry product differentiation

A) increases the threat of rivalry by forcing each firm in an industry tocompete directly with one another instead of allowing them tocarve out their own unique product niche.

B) reduces the threat of rivalry to zero.C) has no impact on the threat of rivalry.fuwnp

59) With regard to the threat of suppliers, product differentiation

t.B) has no impact on the threat of suppliers.C) can either increase or reduce the threat of suppliers.D) increases the threat of suppliers because a firm with a highly

differentiated product is unable to pass increased costs on tocustomers.

60) In emerging industries

B)c)D)

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57)

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D) creativity; resoiiiCes

.,B

as a basis of product differentiation.A) product differentiation efforts are focused on product refinement

C) firms can sometimes be tempted to exaggerate the extent to whichthey have refined and improved their products and services.

D) firms that are first movers are unlikely to gain productdifferentiation advantages based on buyer loyalty and highswitching costs.

61) In a declining industry 61)A) highly differentiated firms may be able to gain product

differentiation advantages by preempting strategically valuableassets.

B) firms that are first movers can gain product differentiationadvantages based on perceived ical leadership.

D) product differentiation efforts are focused on product refinementas a basis of product differentiation.

62) Which of the following bases of product differentiation is almost always 62)easy to duplicate?

63) \ /hich of the following bases of product differentiation is usually costlyto duplicate?

A) Product customizationC) Consumer marketing

A) Links with other firmsC) Product features

B) Product mixW*effi

W**,D) Product mix

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64)o-64) I /hich bases of product differentiation is by far the most popular urayfor firms to try to differentiate their products but is identified as almostalways being easy to duplicate?

A) Distribution channels B) CustomizationC)Productmix @

65) Product features, by themselves, areA) usually can be a source of both a temporary competitive advantage

and a source of a sustainable competitive advantage.

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or a source of a sustainable competitive advantage.D) usually not a source of temporary competitive advantage, but they

can be a source of a sustainable competitive advantage.

66) Under which of the following conditions is the product mix advantage 66)as a basis of product differentiation the least difficult to duplicate?

A) If a firm brings a series of products to market

l-

When the mix of products is highly integrated with each otherIf each of the products in a product mix has unique features

67) Research on architectural competence in pharmaceutical firms suggeststhat

A) not only do some firms possess this competence, but that otherfirms do not; firms without this competence have, on average,been able develop it with minimal investment.

but also that

fltleragb,,been trnable to develop it.C) very few firms possess this competence, but firms without this

competence, on average, are able to develop it.D) virtually every firm possess this competence to some extent.

68) Which of the following bases of product differentiation is generallyviewed as the most difficult to duplicate?

c)D)

b_67)

69) The U-form structure used to implement a product differentiationstrategy

A) has a small corporate staff.B) has simple reporting relationships.C) often uses temporary cross-divisional and cross functional teams

to manage the development and implementation of new,ii irmovative, and highly differentiated products.

D) rarely uses temporary cross-divisional and cross-functional teamsto manage the development and implementation of new,innovative, and highly differentiated products.

70) A

-

structure exists when individuals in a firm have two ormore bosses simultaneously.I A) matriX.#

C) cross-divisional

A) Product featuresC) Location

B) Linkages with other firms#D; R"prtutio.,

B) multi-divisionalD) U-form

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?1)Q7L) The Lockheed Corporation Skunk Works is an example of aA) multi-divisional structure.B) M-form structure.@ tfos5"di$ffiofia{ or'cross-functiortdl team;D) U-form structure.

72) Small entrepreneurial firmsA) have numerous bureaucratic controls but information and ideas

still flow freely and facilitate innovation.B) have relatively few bureaucratic controls which impedes

cross-functional communication, and thus slow innovation.C) have numerous bureaucratic controls that impede cross-functional

communication, and thus slow innovation."iD) have relatively few bureaucratic gontrols whiclr all,ow informado4r

;and ideas to flow freely and to facilitate innovation.

L72)

without this competence have, on

A _

exists when firms are committed to engage in several related 73)product differentiation simultaneously.

A) policy of explorationC) policy of substitution

B) policy of extrapolationW74) ln developing a compensation policy used to implement a product

differentiation strategy, firms willA) provide appropriate incentives for managers and employees to

reduce costs.B) punish individuals for taking risks when their projects are not

successful.

75) More recent work in the area of strategic management regarding 75)Porter's assertion about being stuck in the middle

@,arysffigrednd,trihtd,* &rt di*mis-tttaG,inrctpwffity*Sf,g1rc cost leadership and prodr.rct dif,ferentiation simrdtmeqUslyg1:-an often expect to gain a sustained competitive advantage.

B) supports Porter's argument that firms that attempt tosimultaneously pursue cost leadership and product differentiationwill find themselves at a competitive disadvantage.

C) partially contradicts Porter's argument and finds that firms thatsuccessfully simultaneously pursue cost leadership and productdifferentiation can only expect to gain a temporary competitiveadvantage.

D) partially contradicts Porter's argument and finds that only firms incertain select industries can successfully simultaneously pursuecost leadership and product differentiation and gain a temporarycompetitive advantage.

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A)B)c)

rding the Porter, firms that are stuck in the middle attempt to selllow-priced products and gain large market share.high-priced products and gain a large market share.

77)

78)

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77) The strategy treats its intemational operations as an integratednetwork of distributed and interdependent resources and capabilities.

A) intemationalC) multi-domestic

A) globalS.@-s4ati

B) global$ffi.memqa,,o.,figlr

B) internationalD) multi-domestic

e78) The strategy exploits all of the advantages of bothintemational integration and local responsiveness.

79'1To ensure that the different operations in an intemationally integratedfirm are appropriately coordinated these firms typically manufacturemore products using more components, than dolocally responsive firms.

C) hold individuals responsible for experiments that fail.

fA) standardized; specialized B) specialized; specialized

D) specialized; standardized

80) The fact that Nestl6 has 8,000 brands of which only 750 are registered inmore than one country, and only 80 of which are registered in morethan 10 countries is an example of

A) a cost leadership strategy. B) a niche strategy.@ D) aglobalizationstrategy.'&::t tegji:'ii"r

According to Coach's website, the company has built a distinctive style and prestigious imageover the past 40 years to develop a reputation as "America's preeminent designer, producer, andmarketer of fine accessories and gifts for women and men including handbags, business cases,luggage and travel accessories, wallets, outerwear, eyewear, gloves, scarves and fine jewelry."Coach employs a multi-channel distribution channel to reach its customers including companyowned stores, boutiques in the stores of prominent specialty retailers both within the UnitedStates and abroad and the company operates an online store. Consumers who purchase coachproducts are generally willing to pay the premium price due to the superior quality of Coach'sproducts as well as the perceived prestige of owning a Coach product. Coach stresses thesefeatures in their advertising campaigns and regularly allows movies and television shows tofavorably feature Coach products in appropriate scenes. Over the last five years Coach haspartnered with automobile manufacturers such as Lexus to produce automobiles with Coachinteriors. In an effort to expand its international reach, Coach intends to increase itsintemational distribution and is expanding into ]apan through Coach lapan, Inc. a joint venturewith a local company that will allow Coach to control international distribution and to maintain a

80)

consigfr brand strategy domestically and abroad.( 8U Wlri.h generic business level strategy is Coach pursuing?

An \-/rceme*r B)Relateddiversification-/Y C) Cost leadership D) Unrelated diversification

arlTh" price premium that customers are willing to pay for the superioran \-d"ality and perceived prestige of Coach's products over the prices of5T similar products are known as' A) heroic prices. B) marginal prices.

81)

;#4ftffim+q,e4,ffi D) elastic prices.

( ,rl flf".n of the following bases of product differentiation does Coach\-dppuur to be employing?

A) Distribution channels, service and support, and links with otherfirms

ffiD) Product features

( SSl V\ri"h of the following bases of Coach's competitive advantage is likely\-t6Ue the easiest to duplicate?

A) Reputation B) Location

B) Product features, product complexity and consumer marketing

D) Location, linkages between functions, and reputation

ffi(rrln,* of the following bases of Coach's competitive advantage is likely 84)2 I \-,fo be the most difficult to duplicate?A) Consumer marketingC) Location

8s)

W D) Consumer marketinge business level strategy Coach is pursuing is likely toA) increase the threat of substitutes due to premium pricing.

C) decrease the threat of threat of buyers since Coach can lower itsprices due to its efficient manufacfuring operations.

D) reduce the threat of rivalry to virtually zero.

that the leather handbag market that Coach largely competes in

differentiation efforts on

B) introducing radically new technologies as a basis of productdifferentiation.

C) seeking a viable market niche that will enable them to survive.D) exploiting a first mover advantage as a basis of product

differentiation.

86)

4l

4L

Goach's agreement with Lexus to produce automobiles with CoachZAA\J"ather interior is an example of

I J A) product placement. B) architectural competence.,/--\. reffi.'..--d l D) skunk works.

Aarl )Coach had an organizational structure that used cross-functional- I t Yeams, the members of which reported not only to their functional boss

88)

8e)

(i.e. the head of production), but also to the head of the team, Coachcould be said to be using which organizational structure?

B) Product divisionalD) Multi-domestic

its international expansion activities, Coach is establishing operations e0)at will allow it to control intemational distribution and to maintain a

consistent brand strategy domestically and abroad. In doing thisCoach is employing which intemational strategy?

A) Transnationalpj

C) Multi-domesticD) Unilateral

EssAY. write your answer in the space provided or on a sep.uate sheet of paper.91) Define product differentiation and discuss the role that customer perceptions play in

product differentiation.

92) Identify the three broad categories of product differentiation and identify two basesof differentiation under each category.

93) What is the relationship between product differentiation and managerial creativity?

94) What is the impact of product differentiation on each of the environmental threatsidentified in the five forces framework?

A) U-formffimw

r95) Describe the role of product differentiation and how product differentiation helpsfirms take advantage of opportunities in fragmented industries, in emergingindustries, in mature industries and in declining industries.

96) Identify which bases of product differentiation are likely to be almost always easy toduplicate, whidr can sometimes be costly to duplicate and which are usually costlyto duplicate and discuss under what conditions a bases of differentiation is likely tobe costly to imitate and can be a source of sustained competitive advantage.

97) Identify the two primary forms that the substitutes for bases of productdifferentiation can take.

98) Discuss the similarities and differences of the organizational structures used byfirms pursuing a cost leadership and a product differentiation strategy and discussthe importance of broad decision making authority within a product differentiationstrategy.

99) Is it possible for a firm to implement a cost leadership and product differentiationstrategy simultaneously?

L00) How is the tension between cost leadership and product differentiation manifest inan international context? What are the benefits of local responsiveness? What arethe benefits of global integration? What strategies can a firm use to gain thebenefits of both intemational integration and local responsiveness?

FALSE2) TRUE3) FALSE4) TRIJEs) TRIJE5) FALSE4 TRUE8) TRUE9) FArsE

10) FALSE11) TRIJE12) FALSE13) TRIJE14) TRT.JEls) FALSE15) FALSE14 TRTJE18) FALSE19) FALSE20) TRUE21) TRTJE22) FALSE23) FALSE24) TRUE2s) TRUE26) TRUE2nFALSE28) TRUE29) FATSE30) FALSE31) FALSE32) TRLJE33) FALSE34) FALSE3s) TRUE35) TRLJE34 TRUE38) TRUE3e) FALSE40) TRUE41) A42)B43) C44)B4s) c46) A4nB48) B4e) Bs0) Ds1) A

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s2) cs3) c54) Bss) As6) As7)Ds8) Ds9) A50) B61) C62)D63) B64)D6s) B66)B67)B68) D69) C70) A71) C72)D73)D74)D7s) A76)D77)D78) C79) C80) c81) A82) C83) C84) B8s) c86) B87) A88) C8e) ce0) B91) Product differentiation is a business strategy whereby firms attempt to gain a competitive

advantage by increasing the perceived value of their products or services relative to theperceived value of other firms' products or services. These other firms can be either thatfirm's rivals or firms that provide substitute products or services. By increasing theperceived value of a firm's products or serviceg a firm will be able to charge a higher pricethan it would otherwise be able to do. This higher price can increase a firm's revenues andcan generate competitive advantages. While firms often alter the objective properties oftheir products or services in order to implement a product differentiation strategy, theexistence of product differentiation, in the en4 is always a matter of customer perception.If products or services are perceived as being different in a way that is valued byconsumers, then product differentiation exists. However, just as perceptions can createproduct differentiation between products that are essentially identical, the lack ofperceived differmces between products with very different characteristics can prevent

differentiation.

92) The first category of bases of product differentiation attempts to create perceptions ofproduct differentiation by focusing directly on the attributes of the products or services afirm sells and includes altering the features of products, increasing product complexity,advantageous timing of product introductiorL choosing a physical location. The secondcategory attempts to create the perception of product differentiation by developing arelationship between a firm and its customers and includes product customizatoryconsumer marketing and establishing a reputation. The last category attempts to create aperception of product differentiation through linkages within and between firms andincludes bases such as linkages between functions, links with other firms, changing the mixof products a firm brings to the market, establishing a distribution network, offeringproducts with significant levels of service and support.

93) Product differentiation is ultimately an expression of the creativity of individuals andgroups within firms and is limited only by the opportunities that exist, or that can becreated, in a particular industry and by the willingness and ability of firms to creativelyexplore ways to take advantage of those opportunities. Thus, in general, the potentialbases of product differentiation are limited only by managerial creativity.

94) Successful product differentiation helps a firm respond to each of the environmentalthreats identified in the five forces framework.o Product differentiation helps reduce the threat of new entry by forcing potentialentrants to an industry to absorb not only the standard costs of beginning business but alsothe additional costs associated with overcoming incumbent firms'product differentiationadvantages.o Product differentiation reduces the threat of rivalry because each firm in anindustry attempts to carve out its own unique product niche.o Product differentiation also helps firms reduce the threat of substitutes by makinga firm's current products appear more attractive than substifute products.o Product differentiation can also reduce the threat of suppliers since higher pricescharged by suppliers can often be passed on to a firm's customers due to stron! customerloyalty.o Finally, product differentiation c;u:l reduce the threat of buyers. When a firm sells ahighly differentiated producf it enjoys a "quasi-monopoly" in that segment of the market.Buyers interested in purchasing this particular product must buy it from a particular firm.Any potential buyer power is reduced by the ability of a firm to withhold highly valuedproducts for services from a buyer.

95) Fragmented industries n Lr fragmented industries, firms can use product differentiationstrategies to help consolidate a market.Emerging industries n By being a first mover in these industries, firms can gain productdifferentiation advantages based on perceived technological leadership, preJmption ofstrategically valuable assets, and buyer loyalty due to high switchi.,g cosls.Mature industries n In mature industries, product differentiation efforts often switch fromattempts to introduce radically new technologies to product refinement as a basis ofproduct differentiation.Declining industries n Lr a declining industry product differentiating firms may be able tobecome leaders in this kind of industry based on their reputation, on unique productattributes, or on some other product differentiation basis. Alternatively, highiydifferentiated firms may be able to discover a viable market niche that will enable them tosurvive despite the overall decline in the market.

96) Some bases of product differentiation such as product features are almost always easy toduplicate. Other bases of product differentiation such as product mir; links with otherfirms, product customization, product complexity, and consumer marketing can sometimesbe costly to duplicate. Finally, still other bases of product differentiation such as links

7betw n channelt and service and supportEare usually costly to duplicate.een

61md How costly it is to duplicate a particular basis of product differentiation depends on theions, kinds of resources and capabilities that a basis of product differentiation uses. When thosetimin resources and capabilities are acquired in unique historical settings, when there is someg, uncertainty about how to build these resources and capabilities, or when these resourceslocafi and capabilities are socially complex in nature, then product differentiation strategies thaton, exploit these kinds of resources and capabilities will be costly to imitate. These productrepu differentiation strategies can be a source of sustained competitive advantage for a firm.1s1is However, when a product differentiation strategy exploits resources and capabilities thattt, do not possess these attributes, then those strategies are likely to be less costly to duplicate,distri and even if they are valuable and rare, will only be sources of temporary competitive6ufis advantage.

97) Although some bases of product differentiation including timing location, distributionchannels, and service and support have few obvious close substitutes, others have readilyavailable substitutes. Substitutes for these bases of product differentiation can take twoforms. First, many of the bases of product differentiation can be partial substitutes for eachother. For example, product features, product customizatiory and product complexity areall very similar bases of product differentiation and thus can act as substitutes for eachother. In a similar way, linkages between functions, linkages between firms, and productmix, as bases of product differentiation, can also be substitutes for each other. IBM links itssales, service, and consulting functions to differentiate itself in the computer market.Second, other strategies can be substitutes for many of the bases of product differentiation.For example, one firm may try to gain a competitive advantage through adjusting itsproduct mi4 and another firm may substitute strategic alliances to create the same type ofproduct differentiation.

98) Both cost leadership and product differentiation strategies are implemented through theuse of a functional or U-form organizational structure. However, where the U-formstructure used to implement a cost leadership strategy has few layers, simple reportingrelationshipt a small corporate sta{f, and focuses on only a few business functions, theU-form structure for a firm implementing a product differentiation strategy can besomewhat more complex. For example, firms pursuing a product differentiation strategyoften use a matrix structure that includes temporary cross-divisional and cross-functionalteams to manage the development and implementation of new, innovative, and highlydifferentiated products. These teams bring individuals together from different businessesand different functional areas to cooperate on a particular new product or service.One of the key management controls in a product differentiation strategy is broad-decisionmaking guidelines. These broad decision-making guidelines help bring order to whatotherwise might be a chaotic decision making process. lA/hen managers have noconstraints in their decision-making, they can make decisions that are disconnected fromeach other and inconsistent with a firm's overall mission and objectives. This results indecisions that are either not implemented or not implemented well.However, if decision-making guidelines become too narrow, they can stifle creativitywithin a firm and a firm's ability to differentiate its products is only limited by itscreativity. Thus decision guidelines must be narrow enough to ensure that decisions thatare made are consistent with a firm's mission and objectives.

99) While traditional mil:ragement thought held that this was not possible, recent work hasargued that it is. Firms that are able to successfully differentiate their products andservices are likely to see an increase in their volume of sales. This is especially the case ifthe basis of product differentiation is attractive to a large number of potential customers.Thus product differentiation can lead to increased volumes of sales which, in turn, can leadto economies of scalg leaming, and other forms of cost reduction. Additionally, it may

firms develop special skills in managing the contradictions that are part ofsimultaneously implementing low-cost and product differentiation strategies. However,

the the management of these contradictions depends on socially complex relations amongcase employees, between employees and the technology they use, and between employees andthat the firm for which they work.

100) In an intemational context the tension between cost leadership and product differentiationis manifest by the need for firms to simultaneously be responsive to local market needswhile still integrating operations across a firm's operations in multiple countries. On theone hand, local responsiveness enables a firm to implement a product differentiationstrategy internationally and a failure to be locally responsive in implementing productdifferentiation strategies international$ can lead to marketing blunders. Alternately,global integration enables a firm to gain the cost advantages associated with intemationaloperations. To reconcile the tensions between global integration and local responsivenesssome firms have turned to a transnational strategy that exploits all the advantages of bothintemational integration and local responsiveness. Firms implementing a transnationalstrategy treat their intemational operations as an integrated network of distributed andinterdependent resources and capabilities. In this context, a firm's operations in eachcountry are not simply independent activities attempting to respond to local market needs;they are also repositories of ideas, technologies, and management approaches that the firmmight be able to use and apply in its other intemational operations.