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Transcript of Product Differentiation Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic...
Product Product DifferentiationDifferentiation
Copyright © 2006 Pearson Prentice Hall. All rights reserved. Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney & HesterlyStrategic Management & Competitive Advantage - Barney & Hesterly 5-5-11
Chapter 5Chapter 5
Strategic Management & Competitive Advantage – Barney & Hesterly 2
Product DifferentiationProduct Differentiation
Copyright © 2006 Pearson Prentice Hall. All rights reserved. Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney & HesterlyStrategic Management & Competitive Advantage - Barney & Hesterly 5-5-22
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?
Strategic Management & Competitive Advantage – Barney & Hesterly 3
Product DifferentiationProduct Differentiation
Copyright © 2006 Pearson Prentice Hall. All rights reserved. Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney & HesterlyStrategic Management & Competitive Advantage - Barney & Hesterly 5-5-33
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
Example: Wal-Mart
Example: Harley-Davidson
Strategic Management & Competitive Advantage – Barney & Hesterly 4
Product DifferentiationProduct Differentiation
Copyright © 2006 Pearson Prentice Hall. All rights reserved. Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney & HesterlyStrategic Management & Competitive Advantage - Barney & Hesterly 5-5-44
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
Strategic Management & Competitive Advantage – Barney & Hesterly 5
Product DifferentiationProduct Differentiation
Copyright © 2006 Pearson Prentice Hall. All rights reserved. Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney & HesterlyStrategic Management & Competitive Advantage - Barney & Hesterly 5-5-55
Bases of DifferentiationA 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
Strategic Management & Competitive Advantage – Barney & Hesterly 6
Product DifferentiationProduct Differentiation
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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
Example: Fred Smith and FedEx
Strategic Management & Competitive Advantage – Barney & Hesterly 7
Product DifferentiationProduct Differentiation
Copyright © 2006 Pearson Prentice Hall. All rights reserved. Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney & HesterlyStrategic Management & Competitive Advantage - Barney & Hesterly 5-5-77
Bases of DifferentiationThree 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
Strategic Management & Competitive Advantage – Barney & Hesterly 8
Product DifferentiationProduct Differentiation
Copyright © 2006 Pearson Prentice Hall. All rights reserved. Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney & HesterlyStrategic Management & Competitive Advantage - Barney & Hesterly 5-5-88
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
Strategic Management & Competitive Advantage – Barney & Hesterly 9
Product DifferentiationProduct Differentiation
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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
Strategic Management & Competitive Advantage – Barney & Hesterly 10
Product DifferentiationProduct Differentiation
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Bases of DifferentiationFirm Linkages• Linkages among Functions in the Firm – using a
circuit 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
Strategic Management & Competitive Advantage – Barney & Hesterly 11
Product DifferentiationProduct Differentiation
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Bases of DifferentiationFirm 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
Strategic Management & Competitive Advantage – Barney & Hesterly 12
Product DifferentiationProduct Differentiation
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Competitive Advantage
A product differentiation strategy must meet theVRIO 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.
Strategic Management & Competitive Advantage – Barney & Hesterly 13
Product DifferentiationProduct Differentiation
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Fragmented Industry
Branding: commodity differentiated product
Example: Kellogg’s Corn Flakes
Emerging Industry
First mover advantages: captures market share
Example: Motorola Cell Phones
Exploiting Industry-type Opportunities
The Value of Product Differentiation
Strategic Management & Competitive Advantage – Barney & Hesterly 14
Product DifferentiationProduct Differentiation
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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
The Value of Product Differentiation
Strategic Management & Competitive Advantage – Barney & Hesterly 15
Product DifferentiationProduct 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
Strategic Management & Competitive Advantage – Barney & Hesterly 16
Product DifferentiationProduct Differentiation
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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
Strategic Management & Competitive Advantage – Barney & Hesterly 17
Product DifferentiationProduct Differentiation
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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
Strategic Management & Competitive Advantage – Barney & Hesterly 18
Product DifferentiationProduct Differentiation
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Organizing for Product Differentiation
Example: Ford Taurus Cross-Functional Teams
OrganizationalStructure
• U-Form with cross-functionalteams
ManagementControls
CompensationPolicies
• flexibility
• broad guidelines
• creativityencouraged
Reward:• cross-
functionalcooperation
• creativity
• risk taking
Strategic Management & Competitive Advantage – Barney & Hesterly 19
Product DifferentiationProduct Differentiation
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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
Strategic Management & Competitive Advantage – Barney & Hesterly 20
Product DifferentiationProduct Differentiation
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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
Example: Sony Example: Siemens
Strategic Management & Competitive Advantage – Barney & Hesterly 21
Product DifferentiationProduct Differentiation
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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)
Strategic Management & Competitive Advantage – Barney & Hesterly 22
Product DifferentiationProduct Differentiation
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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
Product differentiation principles can be applied to your personal and professional lives.