1. Strategic Management Strategic Choices: Differentiation
Mohammad Najjar, PhD Management Science

2. Strategic Management Process
External
Analysis
Strategic
Choice
Strategy
Implementation
Competitive
Advantage
Mission
Objectives
Internal
Analysis
Business Level
Strategy
Corporate Level
Strategy
How to Position a
Business
in the Market?
Which Businesses
to Enter?

3. Business Level Strategy
Two Generic Business Level Strategies
Cost Leadership:
• generate economic value by having lower costs
than competitors
Example: Wal-Mart
Product Differentiation:
• generate economic value by offering a product
that customers prefer over competitors’ product
Example: Harley-Davidson

4. Business Level Strategy: Differentiation
Time for a question: Think of a restaurant you like,,,
>> What has the restaurant had to do to create its differentiation from competing restaurants?
>> How easy would it be for other restaurants to imitate the differentiation that sets this restaurant apart from competitors?

5. Business Level Strategy: Differentiation
A business level strategy intended to:
• increase the perceived value of the focal
firm’s products and/or services relative
to the value of competitor’s products and/or
services
• create a customer preference for the focal firm’s
products and/or services

6. Business Level Strategy: 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

7. Business Level Strategy: 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
Example: Fred Smith and FedEx: an idea of overnight delivery,
The idea was dismissed by his professor as a nonsense.

8. Business Level Strategy: Differentiation
Bases of Differentiation- Three Categories
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

9. Business Level Strategy: Differentiation
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

10. Firm-Customer Relationships
Business Level Strategy:
Differentiation
Firm-Customer Relationships
• Customization – Dell computers, customers get exactly
what they desire
• Reputation – Harley-Davidson Motorcycles-reputation is
so strong that some people tattoo the logo
on their bodies
• Service and Support – an oil change shop begins
to offer pick up and delivery of cars

11. Business Level Strategy: Differentiation
Firm Linkages
• Linkages among Functions in the Firm – Ford Motor
Company’s combination of auto manufacturing
and financing
• Linkages with other Firms – Mattel toys in McDonald’s
Happy Meals
• 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,
Coke & Pepsi vending machines

12. Business Level Strategy: Differentiation
Successful product differentiation results in two important outcomes that generate value for the focal firm:
1- customers develop preferences for the focal firm’s products and/or services.
2- when customers perceive a benefit to themselves they become willing to pay a premium for the differences that create that benefit. If the benefit is great enough that customers are willing to pay a price that is above the focal firm’s average total cost,
The firm whose customers have a preference for its products and a willingness to pay a premium price for its products is in an enviable position.

13. Business Level Strategy: Differentiation and Industry-type
Fragmented Industry:
>> product differentiation through branding can take a commodity-type product and make it a differentiated product
e.g. Kellogg’s Corn Flakes is a classic example of this
Emerging Industry:
>> first mover advantages (brand loyalty, switching costs, technology standards, etc.) may accrue to the firm that can quickly differentiate its products in the minds of customers
e.g. Motorola did this in the cell phone market. They used their brand equity from the telecommunications and technologies businesses to differentiate their cell phones early.

14. Business Level Strategy: Differentiation and Industry-type
Mature Industry:
>> firms attempt to differentiate established products by “refining” the product— improved
>> firms may also differentiate a product by offering new levels of service to accompany the product
e.g. Ford has tried to differentiate the repair and maintenance services offered by its dealers.
Declining Industry:
>> product differentiation in declining industries is usually a matter of moving toward niches
>> by definition, the number of customers in a declining industry is decreasing and firms recognize that remaining customers must have a strong need to remain customers in the industry—therefore, firms can move to meet those remaining needs in specialized ways

15. Business Level Strategy: 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

16. Business Level Strategy: Differentiation and Imitation
Product Features
Easy
Duplication
of Bases
Product Mix
Usually
Costly
May be
Costly
Location
Product complexity
Reputation
Links with other firms
Links between functions
Product customization
Service and Support
Distribution Channels

17. Business Level Strategy: Differentiation and Substitute
>> The ability of a base of differentiation to generate a competitive advantage also depends on the proximity of close substitutes.
>> Although some substitutes may be apparent in a market, many substitutes for a differentiated product may ‘pop up’ in the marketplace at any time.
>> Managers should monitor the environment for potential substitutes. Bases of differentiation may need adjustment in order to keep potential substitutes from becoming close substitutes

18. Business Level Strategy: Implementing a Differentiation Strategy
Organizational
Structure
Management
Controls
Compensation
Policies
Reward:
• U-Form with
cross-functional
teams
• flexibility
• cross-
functional
cooperation
• broad guidelines
• creativity
encouraged
• creativity
• risk taking
Example: Ford Taurus Cross-Functional Teams

19. Business Level Strategy: Implementing a Differentiation Strategy
>> The main idea behind using management controls in the implementation of a product differentiation strategy is that of flexibility. Not only must managers and employees have the freedom to be flexible, they should also be encouraged to be creative and adaptable.

20. Business Level Strategy: Implementing a Differentiation Strategy
>> As a matter of firm policy, decision making guidelines are broader—allowing greater flexibility. Also, managers and employees should explicitly be given the freedom and encouragement to experiment with new ideas. Managers and employees need to know that if experimentation leads to failure they will not be punished for having tried
>> In the simplest of terms, compensation policies should be structured to reward managers and employees for cooperating within cross functional teams and being creative in the process.

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