Product Differentiation

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Product Differentiation Strategy
A formula that is costly -or impossible- for your competitors to recreate is central.
Goal is to be a quasi-monopolist.
Product Differentiation
•A business level strategy intended to:
-increase the perceived value of the firm's products
relative to competitor's products.
-create a customer preference for the firm's products.
When Does a Differentiation Strategy Work Best?
•There are many ways to differentiate a product that have value and please customers
•Buyer needs and uses are diverse
•Few rivals are following a similar differentiation approach
•Technological change and product innovation are fast-paced
Methods of Differentiation
•Almost anything can be a source of differentiation.
•Product Attributes
•Firm-Customer Relationships
•Firm Linkages
Product Attributes
•Product Features - the shape of a golf club head •Product Complexity - multiple functions on a watch •Location - locating next to a freeway exit
Firm-Customer Relationships
•Consumer Marketing- differentiation driven thru altering perceptions not necessarily product features, e.g. Mountain Dew.
•Reputation- time-dependent, may persist beyond actual differentiation.
•Customization: enterprise software crafted for customer.
Firm Linkages
•Linkages among Functions in the Firm- developing coordinating capabilities across functional or specialty groups; architectural competence.

•Linkages with other Firms: Differentiation achieved through association or marketing, e.g. co-branding.

•Product Mix- Developing interconnectivity or complementarities among goods or services.

•Distribution Channels: Forging links to expand delivery of goods or services, e.g. banks in grocery stores

•Service and Support: Adjusting level of service through other firms, e.g. coordination between auto dealers and mfgrs.
Imitability of Differentiation Strategies
•Increasing imitability costs: firms often combine multiple sources of differentiation.
•But some are costly to imitate than others. Note role of complexity and time.
•Which basis of differentiation least costly to imitate? •Product Features
Organizing for Differentiation
•Structure: U-form, but with cross-functional teams •Controls: Flexibility, creativity encouraged •Compensation: Reward creativity, cooperation, risk-taking
Major Risks of Differentiation Strategy
•Customers may decide that the price differential is too large.
•Means of differentiation may cease to provide value for customers.
•Dramatic technological change could render differential strategy obsolete.
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