What are the different ways to differentiate products/services?
- Differentiation by product/service quality
Politeness, helpfulness. - Differentiation by branding
Branding can be used to differentiate and position in the mind of the customer. - Differentiation by unique product characteristic
- Differentiation by distribution
- Differentiation based on consumer orientation
Comment on an organisation’s ability to sustain differentiation and the factors that make it easier to sustain differentiation
Organisation’s ability to sustain differentiation depends on two aspects:
- Maintain the perceived value demonstrated to customers
- Speed of imitation. The longer the lag period, the better the sustainability.
Factors that make it easier to sustain differentiation:
- Uniqueness as a barrier to competitors
Aspects such as learning, synergy, and first-mover
- Cost advantage
- Multiple sources of differentiation
This makes it difficult to imitate, especially if its from the coordination of value chain activities.
- Consumer switching costs
Fixed cost that customers must pay to suppliers
What are the common pitfalls of a differentiation strategy?
- Over-elaboration
If the quality level is higher than the consumers need, they will switch to a competitor offering the required quality at a cheaper price. - Failing to signal value to customers
The consumer must be able to perceive of the value offered. - Too big a price difference
If the price difference becomes too large, the consumer may reevaluate the product/service differentiation. - Focus on product instead of value chain
Opportunities to differentiate via the value chain are overlooked. - Failure to recognise different segments in the market
An organisation that lacks knowledge about their customers and buying criteria are at risk to competitors with that knowledge.
What are the alternatives for a low-cost strategy?
Lower margins - high market share.
Lower costs - higher margins.
What is a cost driver and what are some examples?
A cost driver are factors that, when combined, determine the cost of a given activity and the cost position of an organisation. Some examples include:
- Economies of scale
- No-frills products/services
- Low-cost distribution
Selection of a cheaper channel or elimination of a channel can be very savvy. - Location cost advantage
Near suppliers affects inbound logistical costs. Near customers affects outbound logistical costs. - Institutional factors
Government legislation, unionisation, sales subsidies, tariffs and levies.
What are the pitfalls of a low-cost strategy?
- Overlooking small activities
- Entry of lower-cost competitors
An entrant that gains market share with lower prices can start a war with no winners. - Concentrating only on manufacturing costs
The total value chain needs to be scrutinised for cost saving opportunities. - Ignoring the purchasing/procurement function
- False perception of the cost drivers
Misdiagnosing cost drivers can lead to failed expenditure or even worsen costs. - Contradictory cost reduction exercises
Organisations often take contradictory cost-reduction steps - Reduced flexibility
The big capital investment to achieve lower manufacturing costs and efficiencies needed could therefore lock a business into a certain technology, leaving it vulnerable to competitors with a more advanced technology
What is a focus strategy and the two options available?
A focus strategy aims to occupy only one specific niche in the market with a limited product range.
The two options are:
- Low-cost focus
requires that the organisation find a niche where the needs are less costly to meet than the rest of the market.
- Differentiation focus
requires a specific segment that wants unique product attributes.
Advantages of a focus strategy
- Making an impact with limited resources
It allows new organisations to compete until they have the resources to expand. - Avoiding distraction/dilution of strategy
It’s easier to match the needs of the market when all the resources, skills and efforts is focused on one objective. - Bypassing competitor skills and assets
A focused organisation can choose the basis on which to compete, on their own terms, rather than on large organisation’s. - Providing a positioning device
The organisation may be able to identify itself with a specific product line, segment or geographic location - Reducing competitive pressures
A focus organisation can choose which segment to compete in, reducing competitive intensity
State and explain the factors that determine the sustainability of a focus strategy
- Sustainability against broadly targeted competitors
The more the focuser’s value chain differs from that of its broad-based competitors, the more sustainable its strategy will be. - Sustainability against imitators
Either a totally new entrant or one that has reevaluated its strategy and decided to follow an identical focus strategy. Barriers to entry include scale, differentiation, channel loyalty or capital. - Sustainability against segment substitution
Factors such as technology or environmental change could erode the market or kill it completely.
Conditions that make a focus strategy attractive
- Profitability
The segment is big enough to be profitable - Growth potential
Segment has good growth potential - Size
Segment isn’t crucial to the success of larger organisations, but sizeable enough for smaller ones - Resources
The organisation has the skills and resources to serve the segment effectively - Defendable
The organisation can defend against challengers with customer goodwill and superior ability
What are some advantages of being a follower?
- Exploiting positioning mistakes
First-mover may misjudge the preferences and buying criteria or try to satisfy too large a market. They may be vulnerable to a more precise follower. - Exploiting product mistakes
Weaknesses in its product may provide the opening a follower needs to overcome the first-mover’s initial advantage - Exploiting marketing mistakes
If the first-mover’s marketing entry is not correctly managed, followers may take advantage of this - Technological flexibility
If the technology related to a product is rapidly changing, the follower may gain advantage with superior technology - Exploiting resource limitations
If the pioneer doesn’t spend enough in manufacturing facilities or marketing, a follower may outspend the pioneer and overcome their advantage
What are the reasons why business synergy occurs?
- Shared know-how
Sharing knowledge and skills across SBUs - Shared intangible resources
Economies of scale can be created and duplication can be avoided by sharing physical assets or resources such as manufacturing capacity or research results - Pooled negotiation power
Provides greater leverage in the supply chain and results in lower costs - Coordinated strategies
Can help reduce inter-unit rivalry and can have a shared response to a competitive threat - Vertical integration
Coordinating the flow of products and services can reduce inventory costs, speed up product development and improve market access - Combined business creation
For example, joint venture or alliance
What are the advantages of synergy?
- Increase customer value and sales
- Decreased operating costs (economies of scale)
- Reduced investment and higher resource productivity
What are the pitfalls of synergy?
- Defining synergies incorrectly
Managements often over- or under-estimate the degree of synergy - Missing the window of opportunity
Synergy opportunities are time-sensitive. 70%-75% of synergy is realised in the first year and a drawn-out merger will result in wasted opportunity - High-pressure deals
Mergers and acquisitions obtained under pressure are bound to be riskier and obtain less synergy - Lack of sameness
Mergers are riskier when the businesses are in different industries - Revenue increase is less likely than cost reduction
What are the four zones of innovation?
- Breakthrough innovation
Those that move businesses ahead of competition - Incremental innovation
Small changes in existing products/services to keep competitive - Game changer innovation
Out-of-the-box innovations that transform markets, countries and societies - Disruptive innovation
Focuses on under-serviced markets with an initial product offering at a lower price to get the market acquainted
