Product Differentiation Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. 5-1 Chapter 5

Strategic Management & Competitive Advantage – Barney & Hesterly 2 Product Differentiation Copyright © 2012 Pearson Prentice Hall. All rights reserved. 5-2 MissionObjectives External Analysis Internal Analysis Strategic Choice Strategy Implementation Competitive Advantage The Strategic Management Process Business Level Strategy Corporate Level Strategy How to Position a Business in the Market? Which Businesses to Enter?

Strategic Management & Competitive Advantage – Barney & Hesterly 3 Product Differentiation Copyright © 2012 Pearson Prentice Hall. All rights reserved. 5-3 Business Level Strategies Two Generic Business Level Strategies Cost Leadership: generate economic value by having lower costs than competitors Product Differentiation: generate economic value by offering a product that customers prefer over competitors’ product Example: Wal-Mart Example: Harley-Davidson

Strategic Management & Competitive Advantage – Barney & Hesterly 4 Product Differentiation Copyright © 2012 Pearson Prentice Hall. All rights reserved. 5-4 Product Differentiation Product differentiation is a business level strategy in which firms attempt to create and exploit differences between their products and those offered by competitors. These differences may lead to competitive advantage if customers perceive the difference and have a preference for the difference.

Strategic Management & Competitive Advantage – Barney & Hesterly 5 Product Differentiation Copyright © 2012 Pearson Prentice Hall. All rights reserved. 5-5 Bases of Differentiation A base of differentiation must fill some customer need: image status comfort taste beauty style furthering a cause reliability in use safety cleanliness service quality accuracy hunger A differentiated product fills one or more needs better than the products of competitors

Strategic Management & Competitive Advantage – Barney & Hesterly 6 Product Differentiation Copyright © 2012 Pearson Prentice Hall. All rights reserved. 5-6 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 Example: Fred Smith and FedEx

Strategic Management & Competitive Advantage – Barney & Hesterly 7 Product Differentiation Copyright © 2012 Pearson Prentice Hall. All rights reserved. 5-7 Bases of Differentiation Three Categories 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

Strategic Management & Competitive Advantage – Barney & Hesterly 8 Product Differentiation Copyright © 2012 Pearson Prentice Hall. All rights reserved. 5-8 Bases of Differentiation Product Attributes preferences are created by actual differences in the tangible product or service offered by the focal firm vis-à- vis competitors’ offerings product features (Arm & Hammer’s baking soda toothpaste) product complexity (new digital cameras compared to single use film cameras) timing of product introduction (release of movies during the Holiday and Summer seasons) location (Chevron’s company-owned, combined c-stores & gas stations are situated in prime traffic locations)

Strategic Management & Competitive Advantage – Barney & Hesterly 9 Product Differentiation Copyright © 2012 Pearson Prentice Hall. All rights reserved. 5-9 Bases of Differentiation Firm-Customer Relationships preferences are created as the focal firm combines the competencies of different functions within or across organizations to produce tangible and/or intangible differences between the focal firm’s offerings and those of competitors linkages among functions within the focal firm (Ford Motor Company’s combination of auto manufacturing and financing) linkages with other firms (Mattel toys in McDonald’s Happy Meals) product mix (Cisco’s wide range of Internet technology products) distribution channels (Coke & Pepsi vending machines) service and support (Lexus service)

Strategic Management & Competitive Advantage – Barney & Hesterly 10 Product Differentiation Copyright © 2012 Pearson Prentice Hall. All rights reserved Bases of Differentiation Firm Linkages preferences are created as the focal firm develops and exploits relationships with customers based on what the focal firm’s target customers want product customization (Dell Computers-customers get exactly the features desired) consumer marketing (Mountain Dew-changed the image of the product through marketing-product stayed the same) product reputation (Harley-Davidson Motorcycles-reputation is so strong that some people tattoo the logo on their bodies)

Strategic Management & Competitive Advantage – Barney & Hesterly 11 Product Differentiation Copyright © 2012 Pearson Prentice Hall. All rights reserved 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.

Strategic Management & Competitive Advantage – Barney & Hesterly 12 Product Differentiation Copyright © 2012 Pearson Prentice Hall. All rights reserved The Value of Product Different Neutralizing Threats how product differentiation can neutralize the threats of the forces mentioned in the Five Forces Model along with an example of each one. If the focal firm’s product differentiation strategy is effective:

Strategic Management & Competitive Advantage – Barney & Hesterly 13 Product Differentiation Copyright © 2012 Pearson Prentice Hall. All rights reserved The Value of Product Different Threat of Entry would-be entrants face the costs of overcoming customers’ preferences for the focal firm’s products and/or services Example: Toyota was protected from Hyundai’s entry into the U.S. market because Hyundai had to enter at a low price and advertise heavily to attract customers away from Toyota’s well- established Corolla.

Strategic Management & Competitive Advantage – Barney & Hesterly 14 Product Differentiation Copyright © 2012 Pearson Prentice Hall. All rights reserved The Value of Product Different Threat of Rivalry customers have, to some extent, segmented themselves based on their preferences for the products of the several competing firms in a market. Thus, the rivalry is generally lower among firms competing in a market of differentiated products.

Strategic Management & Competitive Advantage – Barney & Hesterly 15 Product Differentiation Copyright © 2012 Pearson Prentice Hall. All rights reserved The Value of Product Different Threat of Substitutes customers will find the focal firm’s products and services substantially more attractive than substitute products (i.e., customers are less inclined to even try the substitute product and the focal firm is therefore insulated from the threat of the substitute)

Strategic Management & Competitive Advantage – Barney & Hesterly 16 Product Differentiation Copyright © 2012 Pearson Prentice Hall. All rights reserved The Value of Product Different Threat of Suppliers the power of suppliers may be mitigated in two ways. First, the focal firm will likely be able to pass supplier price increases along to customers who have a preference for the focal firm’s differentiated product (customers with a preference for a differentiated product tend not to be price sensitive). Second, a firm that enjoys the strong preference of customers will usually have more bargaining power with suppliers compared to competitors that do not have differentiated products and services.

Strategic Management & Competitive Advantage – Barney & Hesterly 17 Product Differentiation Copyright © 2012 Pearson Prentice Hall. All rights reserved The Value of Product Different Threat of Buyers the power of buyers is reduced because the focal firm enjoys a quasi-monopoly. By definition, if a firm has a highly differentiated product, then the firm is the only firm in that market that can offer that particular product. Customers with a preference for the focal firm’s products and services must buy from the focal firm, thus reducing the power of buyers.

Strategic Management & Competitive Advantage – Barney & Hesterly 18 Product Differentiation Copyright © 2012 Pearson Prentice Hall. All rights reserved 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 19 Product Differentiation Copyright © 2012 Pearson Prentice Hall. All rights reserved 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 20 Product Differentiation Copyright © 2012 Pearson Prentice Hall. All rights reserved Exploiting Other Opportunities Trends or Fads 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 The Value of Product Differentiation

Strategic Management & Competitive Advantage – Barney & Hesterly 21 Product Differentiation Copyright © 2012 Pearson Prentice Hall. All rights reserved 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

Strategic Management & Competitive Advantage – Barney & Hesterly 22 Product Differentiation Copyright © 2012 Pearson Prentice Hall. All rights reserved 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

Strategic Management & Competitive Advantage – Barney & Hesterly 23 Product Differentiation Copyright © 2012 Pearson Prentice Hall. All rights reserved Imitability of Product Differentiation Easy to Duplicate Product Features are easy for competitors to observe unless there is a patent, competitors face little cost in imitation may lead to temporary competitive advantage until competitors are able to imitate

Strategic Management & Competitive Advantage – Barney & Hesterly 24 Product Differentiation Copyright © 2012 Pearson Prentice Hall. All rights reserved Imitability of Product Differentiation May be Costly to Duplicate Product mix Links with other firms Product customization Product complexity Consumer marketing these bases all entail a relationship and/or the need for coordination if any of these relationships and/or coordination efforts are marked by unique historical circumstances, causal ambiguity, or more likely, social complexity, then it may be costly for other firms to imitate these relationships

Strategic Management & Competitive Advantage – Barney & Hesterly 25 Product Differentiation Copyright © 2012 Pearson Prentice Hall. All rights reserved Imitability of Product Differentiation Usually Costly to Duplicate Links between functions Timing Location Reputation Distribution channels Service and support all have the common element of uniqueness in some way, most of the time (specific linkages can exist only in the focal firm, there is only one ‘first mover’, there is only one of a prime location, there is only one firm reputation, etc.) in many cases, it would be impossible for a competitor to duplicate the base of differentiation links, reputation, distribution channels, and service and support all depend on relationships

Strategic Management & Competitive Advantage – Barney & Hesterly 26 Product Differentiation Copyright © 2012 Pearson Prentice Hall. All rights reserved Imitability of Product Differentiation 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 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

Strategic Management & Competitive Advantage – Barney & Hesterly 27 Product Differentiation Copyright © 2012 Pearson Prentice Hall. All rights reserved Organizing for Product Differentiation Example: Ford Taurus Cross-Functional Teams Organizational Structure U-Form with cross-functional teams Management Controls Compensation Policies flexibility broad guidelines creativity encouraged Reward: cross- functional cooperation creativity risk taking

Strategic Management & Competitive Advantage – Barney & Hesterly 28 Product Differentiation Copyright © 2012 Pearson Prentice Hall. All rights reserved Cost Leadership and Product Differentiation Can a firm pursue both simultaneously? NoYes use of structure, management control, and compensation policies are nearly opposites firms can do both because some bases of differentiation also lend themselves to low cost structure, controls, & policies are not opposites

Strategic Management & Competitive Advantage – Barney & Hesterly 29 Product Differentiation Copyright © 2012 Pearson Prentice Hall. All rights reserved All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall