Chapter 5 Product Differentiation Copyright 2012 Pearson Education

Chapter 5 Product Differentiation Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. 5 -

Product Differentiation The Strategic Management Process External Analysis Mission Strategic Choice Objectives Strategy Implementation Competitive Advantage Internal Analysis Business Level Strategy How to Position a Business in the Market? Copyright © 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive Corporate Level Strategy Which Businesses to Enter? Advantage – Barney & Hesterly 5 -22

Product Differentiation Business Level Strategies Two Generic Business Level Strategies Cost Leadership: • generate economic value by having lower costs than competitors Example: Wal-Mart Product Differentiation: • generate economic value by offering a product that customers prefer over competitors’ product Example: Harley-Davidson Copyright © 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive Advantage – Barney & Hesterly 5 -33

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. Copyright © 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive Advantage – Barney & Hesterly 5 -44

Product Differentiation Bases of Differentiation A base of differentiation must fill some customer need: • image • beauty • safety • furthering a cause • hunger • status • quality • reliability in use • comfort • style • service • cleanliness • taste • accuracy A differentiated product fills one or more needs better than the products of competitors Copyright © 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive Advantage – Barney & Hesterly 5 -55

Product Differentiation Bases of Differentiation Almost anything can be a base of differentiation • the wide range of customer needs can be filled by a wide range of bases of differentiation • tangible thing (product features, location, etc. ) • intangible concept (reputation, a cause, an ideal, etc. ) • limited only by managerial creativity Example: Fred Smith and Fed. Ex Copyright © 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive Advantage – Barney & Hesterly 5 -66

Product Differentiation Bases of Differentiation Three Categories 1) Product Attributes • exploiting the actual product 2) Firm—Customer Relationships • exploiting relationships with customers 3) Firm Linkages • exploiting relationships within the firm and/or relationships with other firms Copyright © 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive Advantage – Barney & Hesterly 5 -77

Product Differentiation Bases of Differentiation • Product Attributes • preferences are created by actual differences in the tangible product or service offered by the focal firm vis-àvis 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) Copyright © 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive Advantage – Barney & Hesterly 5 -88

Product Differentiation Bases of Differentiation • 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 Mc. Donald’s Happy Meals) • product mix (Cisco’s wide range of Internet technology products) • distribution channels (Coke & Pepsi vending machines) • service and support (Lexus service) Copyright © 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive Advantage – Barney & Hesterly 5 -99

Product Differentiation Bases of Differentiation • 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) Copyright © 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive Advantage – Barney & Hesterly 5 -10 10

Product Differentiation Competitive Advantage A product differentiation strategy must meet the VRIO 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. Copyright © 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive Advantage – Barney & Hesterly 5 -11 11

Product Differentiation The Value of Product Different • Neutralizing Threats • how product differentiation can neutralize 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: Copyright © 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive Advantage – Barney & Hesterly 5 -12 12

Product Differentiation The Value of Product Different • 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 wellestablished Corolla. Copyright © 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive Advantage – Barney & Hesterly 5 -13 13

Product Differentiation The Value of Product Different • 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. Copyright © 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive Advantage – Barney & Hesterly 5 -14 14

Product Differentiation The Value of Product Different • 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) Copyright © 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive Advantage – Barney & Hesterly 5 -15 15

Product Differentiation The Value of Product Different • 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. Copyright © 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive Advantage – Barney & Hesterly 5 -16 16

Product Differentiation The Value of Product Different • 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. Copyright © 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive Advantage – Barney & Hesterly 5 -17 17

Product Differentiation The Value of Product Differentiation Exploiting Industry-type Opportunities Fragmented Industry Branding: commodity differentiated product Example: Kellogg’s Corn Flakes Emerging Industry First mover advantages: captures market share Example: Motorola Cell Phones Copyright © 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive Advantage – Barney & Hesterly 5 -18 18

Product Differentiation 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 Copyright © 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive Advantage – Barney & Hesterly 5 -19 19

Product Differentiation The Value of Product Differentiation Exploiting Other Opportunities Trends or Fads • surf clothing Social Causes • themed credit cards • animal safe clothing Government Policy Economic Conditions • Toyota Prius • outplacement agencies • airport x-ray machines • check cashing services Copyright © 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive Advantage – Barney & Hesterly 5 -20 20

Product Differentiation Rareness of Product Differentiation 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 Copyright © 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive Advantage – Barney & Hesterly 5 -21 21

Product Differentiation Imitability of Product Differentiation Logic of costs of imitation • if would-be imitators face a cost disadvantage of imitation, they will rationally choose not to imitate Copyright © 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive Advantage – Barney & Hesterly 5 -22 22

Product Differentiation Imitability of Product Differentiation • 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 Copyright © 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive Advantage – Barney & Hesterly 5 -23 23

Product Differentiation Imitability of Product Differentiation • 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 Copyright © 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive Advantage – Barney & Hesterly 5 -24 24

Product Differentiation Imitability of Product Differentiation • 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 Copyright © 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive Advantage – Barney & Hesterly 5 -25 25

Product Differentiation Imitability of Product Differentiation Substitutes • some substitutes may be obvious • some substitutes may not be obvious • if no substitutes are obvious, then we would conclude that imitation through substitution will be costly—at least for the present time • if a base of differentiation is valuable, others will attempt to imitate it through duplication and/or substitution Copyright © 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive Advantage – Barney & Hesterly 5 -26 26

Product Differentiation Organizing for Product Differentiation Organizational Structure • U-Form with cross-functional teams Management Controls • flexibility • broad guidelines • creativity encouraged Compensation Policies Reward: • crossfunctional cooperation • creativity • risk taking Example: Ford Taurus Cross-Functional Teams Copyright © 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive Advantage – Barney & Hesterly 5 -27 27

Product Differentiation Cost Leadership and Product Differentiation Can a firm pursue both simultaneously? No • use of structure, management control, and compensation policies are nearly opposites Yes • firms can do both because some bases of differentiation also lend themselves to low cost • structure, controls, & policies are not opposites Copyright © 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive Advantage – Barney & Hesterly 5 -28 28

Product Differentiation All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any 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 Copyright © 2012 Pearson Prentice Hall. Management All rights reserved. Strategic & Competitive Advantage – Barney & Hesterly 5 -29 29