Strategic Management Strategic Choices: Differentiation Mohammad Najjar, PhD Management Science 1.

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Strategic Management

Strategic Choices: Differentiation

Mohammad Najjar, PhD Management Science

Strategic Management Process

Mission Objectives

ExternalAnalysis

InternalAnalysis

StrategicChoice

StrategyImplementation

CompetitiveAdvantage

Business LevelStrategy

Corporate LevelStrategy

How to Position aBusiness

in the Market?

Which Businessesto Enter?

Business Level Strategy

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

Business Level Strategy:Differentiation

Time for a question: Think of a restaurant you like,,,

>> What has the restaurant had to do to create its differentiation from competing restaurants?

>> How easy would it be for other restaurants to imitate the differentiation that sets this restaurant apart from competitors?


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


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

Example: Fred Smith and FedEx: an idea of overnight delivery,The idea was dismissed by his professor as a nonsense.


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

Business Level Strategy:DifferentiationProduct Attributes

• Product Features – the shape of a golf club head

• Product Complexity – multiple functions on a watch

• Location – locating next to a freeway exit


Firm-Customer Relationships

• Customization – Dell computers, customers get exactlywhat they desire

• Reputation – Harley-Davidson Motorcycles-reputation is so strong that some people tattoo the logo on their bodies

• Service and Support – an oil change shop beginsto offer pick up and delivery of cars


• Linkages among Functions in the Firm – Ford Motor Company’s combination of auto manufacturing and financing

• Linkages with other Firms – Mattel toys in McDonald’s Happy Meals

• 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, Coke & Pepsi vending machines

Business Level Strategy:DifferentiationSuccessful product differentiation results in two important outcomes that generate value for the focal firm: 1- customers develop preferences for the focal firm’s products and/or services. 2- when customers perceive a benefit to themselves they become willing to pay a premium for the differences that create that benefit. If the benefit is great enough that customers are willing to pay a price that is above the focal firm’s average total cost,

The firm whose customers have a preference for its products and a willingness to pay a premium price for its products is in an enviable position.

Business Level Strategy:Differentiation and Industry-typeFragmented Industry:>> product differentiation through branding can take a commodity-type product and make it a differentiated producte.g. Kellogg’s Corn Flakes is a classic example of this Emerging Industry:>> first mover advantages (brand loyalty, switching costs, technology standards, etc.) may accrue to the firm that can quickly differentiate its products in the minds of customerse.g. Motorola did this in the cell phone market. They used their brand equity from the telecommunications and technologies businesses to differentiate their cell phones early.

Business Level Strategy:Differentiation and Industry-type

Mature Industry:>> firms attempt to differentiate established products by “refining” the product— improved>> firms may also differentiate a product by offering new levels of service to accompany the producte.g. Ford has tried to differentiate the repair and maintenance services offered by its dealers. Declining Industry:>> product differentiation in declining industries is usually a matter of moving toward niches>> by definition, the number of customers in a declining industry is decreasing and firms recognize that remaining customers must have a strong need to remain customers in the industry—therefore, firms can move to meet those remaining needs in specialized ways


By definition, we assume rareness

• if a product is differentiated, it is rare enough

• customer preferences are evidence of a differentiated product

• increased volume of purchases

• and/or a premium price

Business Level Strategy:Differentiation and Imitation

Easy

May beCostly

UsuallyCostly

Duplicationof Bases

Product Features

Product Mix

Product complexity

Links with other firms

Product customizationLinks between functions

LocationReputation

Distribution ChannelsService and Support

Business Level Strategy:Differentiation and Substitute

>> The ability of a base of differentiation to generate a competitive advantage also depends on the proximity of close substitutes.

>> Although some substitutes may be apparent in a market, many substitutes for a differentiated product may ‘pop up’ in the marketplace at any time.

>> Managers should monitor the environment for potential substitutes. Bases of differentiation may need adjustment in order to keep potential substitutes from becoming close substitutes

Business Level Strategy:Implementing a Differentiation Strategy

Example: Ford Taurus Cross-Functional Teams

OrganizationalStructure

• U-Form with cross-functionalteams

ManagementControls

CompensationPolicies

• flexibility

• broad guidelines

• creativityencouraged

Reward:• cross-

functionalcooperation

• creativity

• risk taking


>> The main idea behind using management controls in the implementation of a product differentiation strategy is that of flexibility. Not only must managers and employees have the freedom to be flexible, they should also be encouraged to be creative and adaptable.


>> As a matter of firm policy, decision making guidelines are broader—allowing greater flexibility. Also, managers and employees should explicitly be given the freedom and encouragement to experiment with new ideas. Managers and employees need to know that if experimentation leads to failure they will not be punished for having tried

>> In the simplest of terms, compensation policies should be structured to reward managers and employees for cooperating within cross functional teams and being creative in the process.

Business Level Strategy:Differentiation & Cost LeadershipCan 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

Strategic Management Strategic Choices: Differentiation Mohammad Najjar, PhD Management Science 1.

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