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Lecture 05:
Differentiation
Niels-Erik Wergin
Mission
Objectives
Internal Analysis
Business Level Strategy How to Position a Business/Product in the Market? (last/this lecture)
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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
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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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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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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Emerging Industry
First mover advantages: captures market share Example: Motorola Mobile Phones
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Declining Industry
Exploiting niches: serving those with strong needs/preferences Example: production of analogue films
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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
Multi-Domestic non-standard product high variance in tastes & preferences decentralized control focused on satisfying tastes & preferences Example: Siemens
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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