Strategic Management Day 3: Product Differentiation

1. Strategic Management Day 3Product DifferentationDecember 11th, 2014

2. Business Level Strategies Cost Leadership: • generate economic value by having lower costs than competitors Example: Ryan Air Product Differentiation: • generate economic value by offering a product that customers prefer over competitors’ product Example: Turkish Airlines

3. Bases of Differentiation • safety • beauty • image • furthering a cause • quality • status • reliability in use • hunger • service • nostalgia • style • comfort • belonging • accuracy • taste • cleanliness

4. 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

5. Bases of Differentiation 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

6. Product Attributes • Product Features – the design of a phone • Product Complexity – multiple functions on a watch • Timing of Introduction – being the first to market • Location – gas stations at a highway

7. 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

8. 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

9. The Value of Product Differentiation • Neutralizing Threats • Exploiting Opportunities

10. The Value of Product Differentiation Focal Firm with Differentiated Product MC Pff ATC D MR Qff

11. 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

12. 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 • historical uniqueness • causal ambiguity • social complexity

13. Imitability of Product Differentiation Product Features Easy Duplication of Bases Timing Product Mix May be Costly Usually Costly Location Product complexity Reputation Links with other firms Links between functions Product customization Distribution Channels Consumer marketing Service and Support

14. Product differentation and Duplication Coast

15. Generic competitive strategies competitive scope

16. Porter’s “Stuck in the Middle” Profit Successful Differentation

17. Risks of generic strategies

18. Cost Leadership and Product Differentiation Can a firm pursue both simultaneously? No Yes • firms can do both because some bases of differentiation also lend themselves to low cost • use of structure, management control, and compensation policies are nearly opposites • structure, controls, & policies are not opposites Example: Rolex Example: Toyota