Product differentiation

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Summary of “Strategic Management and Competitive Advantage”, Chapter 5 …

Summary of “Strategic Management and Competitive Advantage”, Chapter 5
by Jay B. Barney and William S. Hesterly

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  • 1. I’mdifferent!
  • 2. Product Diff erentiation One of two (or many) ways business gains competitive advantage.Summary of “Strategic Management and Competitive Advantage”, Chapter 5 by Jay B. Barney and William S. Hesterly. Presenters: Dwi Arti Anugrah, Endro Catur Nugroho, Marlisa Kurniati, Tri Kuncoro Wati Faculty of Psychology, Universitas Indonesia, 2013 Information in this document is intended for academic purposes only.
  • 3. cheaper quicker Competitive trace- Advantage less How? used by More Mariah • Cost LeadershipBenefits! Carey • Product Differentiation Cheaper! • ??? USD value value USD USD value value 23 23 23 USD 18 cost cost cost cost yours compe- yours compe- titors titors
  • 4. ProductDifferentiation“A business strategy whereby firmattempt to gain a competitiveadvantage by increasing theperceived value of their productsor services relative to theperceived value of other firms’products or services”(Barney & Hesterly, 2012)
  • 5. ProductDifferentiation“A business strategy whereby firmattempt to gain a competitiveadvantage by increasing theperceived value of their productsor services relative to theperceived value of other firms’products or services”(Barney & Hesterly, 2012)
  • 6. Product Differentiation is about Customer Perception
  • 7. Why Differentiate? Focus on specific market Price war competition Declining industry Others?
  • 8. How to Differentiate Product?Focus on:Attributes of Relationship with Linkages within orproducts: customers: between firms:1. Features 5. Customization 8. Among functions within2. Complexity 6. Marketing a firm3. Timing 7. Reputation 9. With other firms4. Location 10. Product mix 11. Distribution channels 12. Service and support
  • 9. altering the features 1 Product Features (materials, functions, etc.) of a product JAVARA™ promotes Indonesia’s finest natural gastronomic heritage: food biodiversity, gastronomic-culture and craftsmanship. The collaboration of the three allows JAVARA to create artisanal, natural and organic food. What makes the product different from other organic foods: 1. No chemical additives (coloring, preservatives, bleaching and flavoring) 2. Fair trade, ensures sustainable agriculture and apply that benefits the farmers, small producers and the consumers. Other exp: Mercedes Benz and “crumple zone”Q: how to ensure product features equal to customer benefits?
  • 10. exposing product parts to Product 2 Complexity create sense of complexity or simplicity Simply put, BreadTalk™ makes bread. It is aimed for the urban community, reflected on its boutique design, breadware, up to the look of the breads themselves. What makes the product different from other bread boutiques’: 1. ‘See-thru’ kitchen to expose the complexity of parts (and process) that made up a simple- looking bread Other exp: BIC and its “handful” partsQ: is complexity (read: sophistication) equal to customer benefits?
  • 11. physical location is 3 Product Location ‘strategic’ or preferable for buying experience 7-Eleven™ is a 24 hours convenience store which provide fresh food and beverages products, groceries with dine in facilities. What makes the product different from other convenience stores: 1. Strategic location. “Dimana ada pengkolan, disitu ada 7-Eleven”, it is where the street junction is. 2. Providing space for buyers to dine-in (read: hangout), hence, buy more. Other exp: Disney’s operation in Orlando, FloridaQ: can online replace physical location yet remain ‘strategic’?
  • 12. perception of ‘more Product Timing 4 to Introduction valuable’ due to perfect timing (needs, trends, etc.) Mobile banking application was was made possible in Indonesia as mobile phone was becoming mass needs and mobile data communication was cheap. Different to its previous technology (SMS-based, which is still being used by telco operators), it uses mobile data application installed in account holders’ smartphone. What makes the product different from other banking methods: 1. It exploits the increasing (if not booming) mobile and smartphone use in Indonesia as well as availability of local apps developers. 2. It address traffic problem(esp. in Jakarta) which was a significant barrier, especially for business owners. Other exp: Microsoft MS-DOS and introduction of PCQ: does being the first promise more likeliness to succeed?
  • 13. Products are customized for Product 5 Customization particular customer (applications) Dell introduced online configurator to custom-build the right desktop and laptop especially for personal and small business users. What makes the product different from other desktops/laptops: 1. It allows buyers to custom-build their desktops and laptops and preview the result before deciding to buy. Other exp: ORACLE and SAPQ: can customization (more expensive) serve non-premium customers?
  • 14. altering customers’ Product 6 Marketing perception through positioning & repositioning L-Men was successful in stirring the minds of thousands (or millions) of Indonesian men (straight, gay, whatever) through its campaign: “you are how your body looks” and promising that “it works”. What makes the product different from other supplements: 1. It is marketed as a lifestyle product instead of food supplement. 2. It links health (fitness) with style in a lifestly- oriented market segment. 3. It bombarded the market with visuals that attracted not just men to buy but also women (or other men) to buy for their partners. Other exp: Mountain Dew as the xtreme sport drinkQ: does repositioning actually give more benefit to customers?
  • 15. complex (and mostly long- Product 7 Reputation established) relationship that enable firm and its customers to ‘take risks’ Cosmos introduced rice-cooker, a big hit appliances in many many Indonesian homes, with an assumption that if their customers were buying their popular rice box, they would also buy the rice- cooker. The assumption was not all-wrong; the rice- cooker survived to stand among other stronger brands. What makes the product different from other rice- cooker: 1. Brand reputation that pomised (and have proven) long-lasting home appliances: “ingat beras, ingat Cosmos”. Other exp: MTV and the world’s first reality showQ: is reputation only built over times? How startup build reps. quickly?
  • 16. linking firm’s different Linkage Between 8 Function strengths and functions to develop products (with more benefit to customers) In a pharmaceutical company where units/departments are divided into areas of specialties (genetics, biology, chemistry, etc) may develop a ultidisciplinary team to explore and work on new drug categories. Apart from being better drugs, company’s ability to coordinate cross function team is a competitive advantage.Q: what are the costs of being unable linking strength & functions?
  • 17. linking a firm’s products Links with Other 9 Firms with other firms’ products to create more value to each product. When deciding to re-brand itself, KFC chose to become “younger”. It chose to link with music, the symbol of young(er) generation, without really making music. Instead, it sells music CD in their meal package. It has proven to increase their sales, achieve the targeted image, and ... surprisingly become popular CD outlets. What makes the product different from other fast food: 1. It worked with music producers to associate both products (KFC’s fastfood and music CD) to the young(er) generation. 2. It made CD sales easy(er), no need to go to music stores. Other exp: Barbie’s NASCAR seriesQ: does co-branding equal to this strategy?
  • 18. a mix of products that are technologically linked or10 Product Mix purchased simultaneously by customers Not the biggest, but Esia was known as provider of cheap telecommunication. It could only survive – and lead the market – by increasing traffic, especially voice. Because technology was not Esia’s USP, it mixed its product (mobile number and top-ups) with cheap Chinese mobile devices and resulted in ‘free’ mobile phones for certain purchase of top-ups. What makes the product different from other telco products: 1. Customers felt that they received ‘free’ mobile phones. In fact, Esia purchased cheap mobile phones, reduce its profit margin on voice communication and compensated by its traffic boost. Other exp: mallsQ: how to retain a product’s USP when sold/distributed as a mix?
  • 19. establishing different Product11 Distribution distribution methods for different targets (customers, locations, etc.) Oriflame is today one of the fastest growing beauty companies selling directly their products to consumers. Rather than investing in a chain of shops, which would have taken time and been very costly, the company decided to move its retail operations into the homes of consumers. What makes the product different from other cosmetics: 1. It uses “gifts from friend” approach to direct-sale their product way before word-of-mouth and social media was even thought about. Other exp: CocalCola and its local bottlersQ:?
  • 20. providing certain level of Service and12 Support service and support associated to products. Olympus was not the biggest camera maker in the world. But in Indonesia, it led the increasing ILC and mirrorrless camera market. It was also the first (if not the only) to offer training for new Olympus ILC, mirrorless and DSLR camera users, setting the service bar higher even at the very beginning of user experience. What makes the product different from other camera: 1. It created educated customers by providing free photography training which, for enthusiast amateurs, was invaluable. Other exp: GE and its independent service networkQ: how to adjust price to match desired post-sales service and support?
  • 21. How to Differentiate Product?Focus on... only one?Attributes of Relationship with Linkages within orproducts: customers: between firms:1. Features 5. Customization 8. Among functions within2. Complexity 6. Marketing a firm3. Timing 7. Reputation 9. With other firms4. Location 10. Product mix 11. Distribution channels 12. Service and support
  • 22. The Value of Product Differentiation
  • 23. Differentiation to Neutralize Threats Five Forces Substitutes Product Model DifferentiationQ: during planning, how to forecast differentiation’s potential to reduce threats?
  • 24. Differentiation to Exploit Opportunities Healtimie offers healthier instant noodle Refinement XEROX copy paper and the copying machines/printers Consolidation market First mover Olympus PEN and the ILC/MirrorlessQ: how product differentiation benefit a firm in declining industry?
  • 25. Sustained Competitive AdvantageRarity -> creativity Imitability
  • 26. Product Imitability Low- cost Feature: Internet TV: Sony -> LG (cheaper) mix customization marketing Maybe costly DIRECT DUPLICATION ILC/MirrorlessSUBSTITUTES Link w/ other firms complexity timing reputation Service & support Usually costly Professional compact 1. Bigger sensors than compact 2. Bright fixed-lens 3. Manual controls 4. RAW shooting 5. Smaller size location distribution
  • 27. Innovation Process: Case Study 3M is a global company that never stops inventing and innovating. Over the years, its innovations have improved daily life for hundreds of millions of people all over the world. 3M has made driving at night easier, made buildings safer, and made consumer electronics lighter, less energy-intensive and less harmful to the environment. They even helped put a man on the moon. Every day at 3M, one idea always leads to the next, igniting momentum to make progress possible around the world.
  • 28. Innovation Process: Case StudyHow 3M put innovation at the heart of itsmanagement and operation? Rewards and Recognition Stretch Goals Empowerment Communication Vision Foresight
  • 29. Innovation Process: Case Study Celebrated ExpertsMeasured Robust Success Network Customer DiverseConnection Technology Innovation Centers Bold around the world Talent including Indonesia
  • 30. Organization Structure: Structure: 1. Few layers 1. Cross divisional/functions Product Differentiation 2. Simple reporting 2. Matrix 3. Small corp. staff 3. Skunk worksCost Leadership 4. Focus on narrow range of functions Management Control: Management Control: 1. Tight cost-control system 1. Broad decision making 2. Quantitatve cost goals 2. Managerial freedom 3. Close supervision of labor, raw 3. Policy of experimentation materials, inventory etc 4. Cost leadership philosophy Compensation: Compensation: 1. Reward for cost reduction 1. Reward for risk taking 2. Incentives for all employees involved 2. Reward for creativity in cost reduction 3. Multidimensional performance measurement
  • 31. Can the firm implement CostLeadership and ProductDifferentiation simultaneously?Yes? No?
  • 32. Cost Leadership & Product Differentiation YES, if: NO, if: • Market is substatially • Product is low-priced large (sales volume) and cover large market • Firm is proven to • Product is high-priced succesfully manage and cover niche market internal contradiction (and conflict)
  • 33. Question
  • 34. Presenters: Dwi Arti Anugrah, Endro Catur Nugroho, Marlisa Kurniati, Tri Kuncoro Wati Faculty of Psychology, Universitas Indonesia, 2013 Information in this document is intended for academic purposes only.