Product Shish Mba Sams-ibm Varanasi

8/14/2019 Product Shish Mba Sams-ibm Varanasi

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Significance

Offered under different brands by competing firms, products fulfilling

the same need typically do not have identical features. The

differentiation of goods along key features and minor details is

an important strategy for firms to defend their price from levellingdown to the bottom part of the price spectrum.

Within firms, product differentiation is the way multi-product firmsbuild their own supplied products' range.

At market level, differentiation is the way through which the qualityof goods is improved over time thanks to innovation. Launching new

goods with entirely new performances is a radical change, often

leading to changes in market shares and industry structures.

In an evolutionary sense, differentiation is a strategy to adapt to

a moving environment and its social groups.

Vertical differentiation

Vertical differentiation occurs in a market where the several goods thatare present can be ordered according to their objective quality from

the highest to the lowest. It's possible to say in this case that onegood is "better" than another.

Vertical differentiation can be obtained:

1. along one decisive feature;2. along a few features, each of which has a wide possible range of

(continuous or discrete) values;

3. across a large number of features, each of which has only apresence/absence "flag".

In the second and third cases, it is possible to find out a product

that is better than another one according to one criteria but worsethan it in respect to another feature.

Vertical differentiation is a property of the supplied goods but, as itis maybe needless to say, the perceived difference in quality by

different consumer will play a crucial role in the purchase decisions.
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In particular, potential consumers can have a biased perception ofthe features of the good (say because of advertising or social

pressure).

Consumer decision rules when the product is differentiated are

presented in this paper.

When evaluating a real market, a good starting point is a top-down

grid of interpretation, we shall present first in 3 segments.

Class Price Crucial feature

Low Low The price is low, theproduct simply works

Middle Middle Use of the good is

comfortable. Mostpeople use it. Mass

market brand.

High High Quality, exclusivity,durability

(= low life-long price),

To this basic classification, one should add two intermediate classes:


Middle-low Low The cheapest

nation-wide brand

Middle-high Middle The cheapest productof high quality

Two extreme classes should finally be added:


Extremely low Low It usually does not

work, it does not last,and it has important

defects

Extremely High High Exclusivity, non

practical, status symbol
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In this way, you can vertically position different brands and productversions, also using clues from advertising campaigns.

If you compare widely different goods fulfilling the same (highly-

relevant) need, you may distinguish at the extreme of your spectrum

necessity goods and at the other luxury goods. In other cases,what makes this difference is, instead, the nature of the need fulfilled.

As a general rule, better products have a higher price, bothbecause of higher production costs (more noble materials, longer

production, more selective tests for throughput,...) and biggerexpected advantages for clients, partly reflected in higher

margins.

Thus, the quality-price relationship is typically upwards sloped. Thismeans that consumers without their own opinion nor the capability of

directly judging quality may rely on the price to infer quality. Theywill prefer to pay a higher price because they expect quality to

be better.

This important flaw in knowledge and information processing capability- an instance ofbounded rationality - can be purposefully exploited

by the seller, with the result that not all highly priced products are of

good quality [1].

Through this mechanism, the demand curve - that in the neoclassical

model - is always downward sloped, can instead turn out to be in theopposite direction.

Horizontal differentiation

When products are different according to features that can't be

ordered, a horizontal differentiation emerges in the market.

A typical example is the ice-cream offered in different tastes.Chocolate is not "better" than lemon.

Horizontal differentiation can be linked to differentiation in colours(different colour version for the same good), in styles (e.g. modern /antique), in tastes.

This does not prevent specific consumers to have a stable preference

for one or the other version, since you should always distinguish what
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belongs to the supply structure and what is due to consumers'subjectivity.

It is quite common that, in horizontal differentiation, the supplier of

many versions decide a unique price for all of them. Chocolate ice-

creams cost as much as lemon ones.

When consumers don't have strong stable preferences, a rule of

behaviour can be to change often the chosen good, looking for varietyitself. An example is when you go to a fast food and ask what you

haven't eaten the previous time.

Fashion waves often emerge in horizontally-differentiated markets

with imitation behaviours among consumers and specific styles going

"in" and "out".

Determinants

How a product rates according to different measures of quality or taste

depends on its physical and immaterial characteristics. The rawmaterial from which it has been built, its engineered design, its

production process are typical determinants of product specificity.

Contrary to the neoclassical approach of technique choice alongisoquants, every change in proportion in productive inputs entering in

the final product results in product differentiation.

More broadly, product differentiation can be:

the indirect effect of different endowments in raw materials,

know-how, style preference of different firms ignoring each

others;

the conscious choice, out of firm strategies, to position each

product against competitors;

the costly, uncertain, and difficult outcome ofinnovation efforts.

Impact on other variables

Differentiated versions of a good can have widely different costs of

production. Upstream, they may be produced using different rawmaterials and semi-manufactured parts, thus referring to diverse
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suppliers and their relative market power. Import of exotic substancescan be the effect of the attempt to introduce new goods on the market

(think for instance to cosmetics).

Downstream, the supply of different and better goods allows for

deeper fulfilment of consumption needs, for production processes athigher productivity as well as for the opening ofexport opportunities toother countries.

For the firms introducing the new version of the product, the

expected results are mainly improvements ofprofits (thanks to lowerelasticity of consumption to price and higher mark-up on costs), sales,

and market shares.

For the consumer, product differentiation can increase thesatisfaction from its consumption. At the same time, he will be

confronted with a wider spectrum of prices. Test whether how muchquality is expensive by playing this business game.

When faced with the burgeoning choice spectrum at supermarket

premises among product varieties of the same category, the consumercan react with several rules of selection; retailers take them into

account to assure profits and profitability, as you can experiment with

this spreadsheet.

At the same time, product differentiation can lead to the exploration

of the product space by unloyal customers, who use the repurchaseoccasions to try new versions.

Long-term trends

The ever growing product differentiation process due to new emergent

firms/countries and the innovation efforts of incumbents hasencountered in the last decades some form of brake due to the

pressure ofglobalized, standardized homogeneous goods with adominant design.

Behaviour during the industry life-cycle

High product differentiation with radically different proposals is typical

of the early stage of an infant industry, until a dominant design willreplace technically imperfect or simply unlucky models.
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Afterwards, when the industry reaches the maturity stage with fewmain competitors, differentiation re-emerge (often due to minor

external changes) as an attempt to soften price competition and toreach new niches of consumers.

Formal models

Dynamic competition with bi-directional product differentiation,

bounded rational consumers, innovation, advertising, and finance

Consumer decision rules

An empirical measurement index of product differentiation

An index of product variety and its empirical application to an

important industrial process

Technological diversification and product differentiation

Data

Consumers data (income, preferences for performance and comfort,

decision rules)

Links

Data about price of a differentiated good: on-line comparison of carattributes and prices
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Product Shish Mba Sams-ibm Varanasi

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