Chapter 4: Business-Level Strategy 125
Bargaining Power of Buyers (Customers)
The distinctiveness of differentiated goods or services reduces customers’ sensitivity to
price increases. Customers are willing to accept a price increase when a product still sat-
isfies their unique needs better than a competitor’s offering. Thus, the golfer whose needs
are specifically satisfied by Callaway golf clubs will likely continue buying those products
even if the price increases. Purchasers of brand-name food items (e.g., Heinz ketchup
and Kleenex tissues) accept price increases in those products as long as they continue to
perceive that the product satisfies their distinctive needs at an acceptable cost. In all of
these instances the customers are relatively insensitive to price increases because they do
not think an acceptable product alternative exists.
Bargaining Power of Suppliers
Because the firm using the differentiation strategy charges a premium price for its
products, suppliers must provide high-quality components, driving up the firm’s costs.
However, the high margins the firm earns in these cases partially insulate it from
the influence of suppliers in that higher supplier costs can be paid through these
margins.^83 Alternatively, because of buyers’ relative insensitivity to price increases,
the differentiated firm might choose to pass the additional cost of supplies on to the
customer by increasing the price of its unique product. However, when buyer firms
outsource the total function or large portions of it to a supplier, especially R&D for
a firm following a differentiation strategy, they can become dependent on and thus
vulnerable to that supplier.^84
Potential Entrants
Customer loyalty and the need to overcome the uniqueness of a differentiated product
create substantial barriers to potential entrants. Entering an industry under these condi-
tions typically demands significant investments of resources and patience while seeking
customers’ loyalty. In these cases, some potential entrants decide to make smaller invest-
ments to see if they can gain a “foothold” in the market. If it does not work they will not
lose major resources, but if it works they can then invest greater resources to enhance
their competitive position.^85
Product Substitutes
Firms selling brand-name goods and services to loyal customers are positioned effectively
against product substitutes. In contrast, companies without brand loyalty face a higher
probability of their customers switching either to products which offer differentiated
features that serve the same function (particularly if the substitute has a lower price) or
to products that offer more features and perform more attractive functions. As such, they
may be vulnerable to innovations from outside the industry that better satisfy customers’
needs (e.g., Apple’s iPod in the music industry).^86
Competitive Risks of the Differentiation Strategy
One risk of the differentiation strategy is that customers might decide that the price dif-
ferential between the differentiator’s product and the cost leader’s product is too large. In
this instance, a firm may be offering differentiated features that exceed target customers’
needs. The firm then becomes vulnerable to competitors that are able to offer customers
a combination of features and price that is more consistent with their needs.
Another risk of the differentiation strategy is that a firm’s means of differentiation may
cease to provide value for which customers are willing to pay. A differentiated product
becomes less valuable if imitation by rivals causes customers to perceive that competitors
offer essentially the same goods or services, but at a lower price. This is the case, as illustrated