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ProductProduct

DifferentiationDifferentiation

Chapter 5Chapter 5

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Strategic Management & Competitive Advantage Barney & Hesterly 2

Product DifferentiationProduct Differentiation

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yright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &Competitive AdvantageCompetitive Advantage -- Barney & HesterlyBarney & Hesterly 22

Mission Objectives

External

Analysis

Internal

Analysis

Strategic

Choice

Strategy

Implementation

Competitive

Advantage

The Strategic Management Process

Business LevelStrategy

Corporate LevelStrategy

How to Position a

Business

in the Market?

WhichBusinesses

to Enter?

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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 product

that customers prefer over competitors product

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Product Differentiation

A business level strategy intended to:

increase the perceived value of the focalfirms products and/or services relative

to the value of competitors products and/or

services

create a customer preference for the focal firms

products and/or services

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Bases of DifferentiationA base of differentiation must fill some

customer 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 needs

better than the products of competitors

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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 filled

by a wide range of bases of differentiation

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Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &Competitive AdvantageCompetitive Advantage -- Barney & HesterlyBarney & Hesterly 77

Bases of DifferentiationThree Categories

1) Product Attributes

2) FirmCustomer Relationships

3) Firm Linkages

exploiting the actual product

exploiting relationships with customers

exploiting relationships within the firm

and/or relationships with other firms

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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

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Firm-Customer Relationships

Customization creating a unique diamond braceletfor a customer

ConsumerMarketing creating brand loyalty to a soap

through image advertising

Reputation sponsoring the local homeless shelter

to engender positive community response

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Bases of DifferentiationFirm Linkages

Linkages among Functions in the Firm using a

circuit board designed in one division in other

divisions

Linkages with other Firms a sporting goods store

sponsors a benefit race by donating running shoes

and receives free radio advertising in return

Product Mix a furniture store begins to sell

home gym equipment, computers, and lawn mowers

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Bases of DifferentiationFirm Linkages

Distribution Channels a doughnut shop begins to

sell its doughnuts through gas stations

Service and Support an oil change shop begins

to offer pick up and delivery of cars in an

office buildings parking garage

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The Value of Product Differentiation

Qind

Pff

Dff

MRff

ATCind

MCff

Pind Dind

ATCff

Qff

Focal Firm with No

Differentiated Product

Focal Firm with

Differentiated Product

Above Normal

ProfitsRobinson, 1934 Chamberlin, 1933

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Fragmented Industry

Branding: commodity differentiated product

Emerging Industry

First mover advantages: captures market share

Exploiting Industry-type Opportunities


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Exploiting Industry-type Opportunities

Mature Industry

Refining product or adding services

Declining Industry

Exploiting niches: serving those with strong needs


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Exploiting Other Opportunities

Trends or Fads

spinners

surf clothing

Government Policy Toyota Prius

airport x-ray machines

Social Causes

themed credit cards

animal safe clothing

Economic Conditions outplacement agencies

check cashing services


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Imitability of Product Differentiation

Logic of costs of imitation

if would-be imitators face a cost disadvantage

of imitation, they will rationally choose not toimitate

historical uniqueness

Sources of costs of imitation

causal ambiguity

social complexity

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Easy

May be

Costly

Usually

Costly

Duplication

ofBases

Product Features

Product Mix

Product complexity

Links with other firmsProduct customization

Consumer marketing

Links between functions

Timing

Location

Reputation

Distribution Channels

Service and Support

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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 costlyat least for the present time

if a base of differentiation is valuable, others

will attempt to imitate it through duplication

and/or substitution

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Organizing for Product Differentiation

Organizational

Structure

U-Form withcross-functional

teams

Management

Controls

Compensation

Policies

flexibility

broad guidelines

creativity

encouraged

Reward:

cross-

functional

cooperation

creativity risk taking

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Cost Leadership and Product Differentiation

Can a firm pursue both simultaneously?

No Yes

use of structure,management control,

and compensation

policies are nearly

opposites

firms can do bothbecause some bases

of differentiation also

lend themselves to

low cost

structure, controls, &

policies are not opposites

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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 in


decentralized control

focused on satisfying


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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)

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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 the

VRIO criteria may generate competitive advantage

a product differentiation strategy is only as goodas its implementation

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