Chapter 5 - Product Differentiation

bases of product differentiation that meet the ____ ________ may generate ___________ _________

*VRIO criteria *competitive advantage

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

exploiting industry-type opportunities (value of product differentiation)

Fragmented Industry - branding: commodity → differentiated product (Kellogg's Corn Flakes) Emerging Industry - first mover advantages: captures market share (Motorola Cell Phones) Mature Industry - refining product or adding services (Ford's emphasis on service) Declining Industry - exploiting niches: serving those with strong needs (NEWT at the Royal Hawaiian)

firm 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 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 building's parking garage

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 Sources of Costs of imitation: - historial uniqueness - causal ambiguity - social complexity

organizing for product differentiation

Organizational Structure *U-Form with cross-functional teams Management Controls * flexibility * broad guidelines * creativity encouraged Compensation Policies - reward: * cross-functional cooperation * creativity * risk taking (Ford Taurus Cross-Functional Teams)

bases of differentiation

a base of differentiation must fill some customer need: image, hunger, comfort, cleanliness, beauty, status, style, taste, safety, quality, service, accuracy, furthering a cause, reliability in use, nostalgia, belonging **a differentiated product fills one or more needs better than the products of competitors

product differentiation

a business level strategy intended to: - increase the perceived value of the focal firm's products and/or services relative to the value of competitor's products and/or services - create a customer preference for the focal firm's products and/or services

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

what can be a base of differentiation

almost anything

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

cost leadership & product differentiation

can a firm pursue both simultaneously? NO * use of structure, management control, and compensation policies are nearly opposites (Rolex) YES * firms can do both because some bases of differentiation also lend themselves to low cost * structure, controls, and policies are not opposites (Toyota)

product differentiation creates

customer preferences

firm-customer relationships

customization: - creating a unique diamond bracelet for a customer consumer marketing: - creating brand loyalty to a soap through image advertising reputation: - sponsoring the local homeless shelter to engender positive community response

a product differentiation strategy is only as good as

its implementation

preferences allow firms to

make above normal profits

the value of product differentiation

neutralizing threats

product attributes

product features: - 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

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 FedEx)

product differentiation principles can be applied to

your personal and professional lives

imitability of product differentiation: substitutes

- some substitutes may be obvious & others may not - if no substitutes are obvious → 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

exploiting other opportunities (value of product differentiation)

- trends or fads - social causes - government policy - economic conditions