05.differentiation

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Lecture 05:

Differentiation

Niels-Erik Wergin

Strategic Management


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Strategic Management Niels Wergin 20092

Mission Objectives

External

Analysis

InternalAnalysis

Strategic

Choice

Strategy

Implementation

Competitive

Advantage

Business Level

Strategy

Corporate Level

Strategy

How to Position a

Business/Product

in the Market?

(last/this lecture)

Which Businesses

to Enter?

(next lectures)

The Strategic Management Process


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Two Generic Business Level Strategies:

Cost Leadership (last weeks lecture):

generate economic value by having lower costs

than competitors

Product Differentiation (this lecture):

generate economic value by offering a productthat customers prefer over competitors product

Example: Asda

Example: Waitrose

Business-Level Strategies


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Product (or Service) differentiation is

a business level strategy intended to:

increase the perceived value of

firms products (or services) compared

to competitors products (or services)

create a customer preference for firms

products / services

Differentiation A Definition

Definition:


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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 needs

better than the products of competitors

Bases of Differentiation



Almost anything can be a base of differentiation

tangible factors (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 filled

by a wide range of bases of differentiation

Example: Mercedes vs. Vauxhall

Bases of Differentiation



3 diff. kinds of Bases of Differentiation (BoD):

1) Product Attributes

2) Firm-Customer Relationships

3) Firm Linkages

exploiting the actual product

exploiting relationships with customers

exploiting relationships within the firm

and/or relationships with other firms

Three Bases of Differentiation


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Product Features e.g. the shape of the product

Product Complexity e.g. multiple functions on

mobile phone

Timing of Introduction being the first to market,

e.g. Sonys Walkman

Location e.g. restaurant located next to a

motorway exit

BoD 1: Product Attributes



Customization creating a unique product for a

customer

e.g. custom-tailored suit, custom-made bike (Bianchi)

Consumer Marketing creating brand loyalty

e.g. strong advertising (Coke, Nike)

Reputation creating reputation for brand

e.g. sponsoring events (Red Bull Air Race)

BoD 2: Firm-Customer Relationships



Linkages among functions in the companyto exploit certain resources

e.g. skills, for example engineered by Lotus Protons

Linkages with other companiesto exploit certain resources

e.g. reputation, for example Porsche Design products

Product Mix

offering extended product mix to attract

customers

e.g. a coffee shop selling food

BoD 3: Firm-Linkages (1)



Distribution Channel

selling own products / services via new

distribution channels

e.g. groceries at service stations, music CDs and

newspapers at coffee shops Service and Support

offering better services and customer support to

supplement the sold product

e.g. IBM servers

BoD 3: Firm-Linkages (2)


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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.

Competitive Advantage


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Value, Rarity & Imitability of Differentiation

Value: Does differentiation result in an

increase in revenues?

customers willing to pay premium? higher sales of product?

Rarity: By definition, we can assume rareness(if product/service is truly differentiated, then it is, by

definition, rare but do consumers value it?)

Imitability: How easy/costly would it be forcompetitors to imitate the differentiating factor?

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Logic of costs of imitation if would-be imitators face a cost disadvantage of imitation,

they will rationally choose not to imitate

Substitutes

if no substitutes are obvious, then we would concludethat 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

Imitability of Differentiation


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Fragmented Industry

Branding: commodity differentiated product

Example: Kelloggs Corn Flakes

Emerging Industry

First mover advantages: captures market share

Example: Motorola Mobile Phones

Exploiting Industry-type Opportunities


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Mature IndustryRefining product or adding services

Example: IBMs emphasis on service

Declining Industry

Exploiting niches: serving those with strong

needs/preferences

Example: production of analogue films

Exploiting Industry-type Opportunities


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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

Exploiting Other Opportunities


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Global Multi-Domestic

standardized product

little variance intastes & preferences

centralized control

focused on efficiency

non-standard product

high variance intastes & preferences

decentralized control

focused on satisfying

tastes & preferences

Example: Sony Example: Siemens

Implementing Differentiation Internationally


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Can a firm pursue both simultaneously?

In past, many thought: No

e.g.: Rolex watches high differentiation, high price

(employees are highly skilled, thus get high wages; high

quality materials etc cannot be made cheaply)

But: Changes in technology made this, under certain

circumstances, possible:

Diversified Quality Production (Streeck)Flexible Specialization (Piore & Sabel)

e.g.: automobile industry (Toyota, Volkswagen)

Cost Leadership AND Differentiation?

S ( )


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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 good

as its implementation

Summary (1)

S (2)


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Business Level Strategy

Cost Leadership Product Differentiation

Cost Advantages

Economies of Scale

Learning Curve Economies

Technology Policy Choices

Competitive Advantage

Depends on MeetingVRIO Criteria

Emphasis on

Organization(Implementation)

(penultimatelecture)

Based on:

Summary (2)

05.differentiation

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