Strategic Management
Lecture 05:
Differentiation
Niels-Erik Wergin
The Strategic Management Process
External
Analysis
Mission
Strategic
Choice
Objectives
Strategy
Implementation
Competitive
Advantage
Internal
Analysis
Business Level
Strategy
Corporate Level
Strategy
How to Position a
Business/Product
in the Market?
(last/this lecture)
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Which Businesses
to Enter?
(next lectures)
Strategic Management © Niels Wergin 2009
Business-Level Strategies
Two Generic Business Level Strategies:
Cost Leadership (last week’s 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
firm’s products (or services) compared
to competitor’s products (or services)
• create a customer preference for firm’s
products / services
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Bases of Differentiation
A base of differentiation must fill some
customer need:
• image
• beauty
• safety
• furthering a cause
• hunger
• status
• quality
• reliability in use
• comfort
• style
• service
• nostalgia
• cleanliness
• taste
• accuracy
• 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. Sony’s 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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Strategic Management © Niels Wergin 2009
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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13/04/2015
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: Kellogg’s 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: IBM’s 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
Social Causes
• spinners
• themed credit cards
• surf clothing
• animal safe clothing
Government Policy
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Economic Conditions
• Toyota Prius
• outplacement agencies
• airport x-ray machines
• check cashing services
Strategic Management © Niels Wergin 2009
Implementing Differentiation Internationally
Multi-Domestic
Global
• standardized product
• non-standard product
• little variance in
tastes & preferences
• high variance in
tastes & preferences
• centralized control
• decentralized control
• focused on efficiency
• focused on satisfying
tastes & preferences
Example: Sony
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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
Product Differentiation
Cost Advantages
Competitive Advantage
Depends on Meeting
VRIO Criteria
Based on:
 Economies of Scale
 Learning Curve Economies
 Technology
 Policy Choices
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Emphasis on
Organization
(Implementation)
(penultimate lecture)