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Strategic Management

Lecture 05:

Differentiation
Niels-Erik Wergin

The Strategic Management Process


External Analysis Strategic Choice Strategy Implementation Competitive Advantage

Mission

Objectives

Internal Analysis

Business Level Strategy How to Position a Business/Product in the Market? (last/this lecture)
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Corporate Level Strategy Which Businesses to Enter? (next lectures)

Strategic Management Niels Wergin 2009

Business-Level Strategies
Two Generic Business Level Strategies:
Cost Leadership (last weeks lecture): generate economic value by having lower costs than competitors Example: Asda Product Differentiation (this lecture): generate economic value by offering a product that customers prefer over competitors product Example: Waitrose
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Differentiation A Definition
Definition: 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) products / services

create a customer preference for firms

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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
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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 factors (product features, location, etc.) intangible concept (reputation, a cause, an ideal, etc.) limited only by managerial creativity Example: Mercedes vs. Vauxhall

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Three Bases of Differentiation


3 diff. kinds of Bases of Differentiation (BoD): 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
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BoD 1: Product Attributes


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
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BoD 2: Firm-Customer Relationships


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)

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BoD 3: Firm-Linkages (1)


Linkages among functions in the company to exploit certain resources e.g. skills, for example engineered by Lotus Protons Linkages with other companies to 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
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BoD 3: Firm-Linkages (2)


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

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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.

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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 for competitors to imitate the differentiating factor?
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Imitability of Differentiation
Logic of costs of imitation
if would-be imitators face a cost disadvantage of imitation, they will rationally choose not to imitate

Substitutes
if a base of differentiation is valuable, others will attempt to imitate it through duplication and/or substitution if no substitutes are obvious, then we would conclude that imitation through substitution will be costly at least for the present time
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Exploiting Industry-type Opportunities


Fragmented Industry
Branding: commodity differentiated product Example: Kelloggs Corn Flakes

Emerging Industry
First mover advantages: captures market share Example: Motorola Mobile Phones

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Exploiting Industry-type Opportunities


Mature Industry
Refining product or adding services Example: IBMs emphasis on service

Declining Industry
Exploiting niches: serving those with strong needs/preferences Example: production of analogue films
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Exploiting Other Opportunities


Trends or Fads
spinners surf clothing

Social Causes
themed credit cards animal safe clothing

Government Policy
Toyota Prius airport x-ray machines
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Economic Conditions
outplacement agencies check cashing services

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Implementing Differentiation Internationally


Global standardized product little variance in tastes & preferences centralized control focused on efficiency Example: Sony
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Multi-Domestic non-standard product high variance in tastes & preferences decentralized control focused on satisfying tastes & preferences Example: Siemens

Cost Leadership AND Differentiation?


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)
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Summary (1)
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

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Summary (2)
Business Level Strategy Cost Leadership
Cost Advantages

Product Differentiation
Competitive Advantage Depends on Meeting VRIO Criteria Emphasis on Organization (Implementation) (penultimate lecture)

Based on: Economies of Scale Learning Curve Economies Technology Policy Choices

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