PRODUCT DIFFERENTIATION & PAPA JOHN’S CASE

STUDY

Student:

Lecturer :

Theory

Background

Facts

Key issues

Analysis

Course of action

Recommendation

Product Differentiation Product differentiation is a business level strategy in which firms attempt to create and exploit differences between their products and those offered by competitors. These differences may lead to competitive advantage if customers perceive the difference and have a preference for the difference. Of course, such differences will lead to competitive advantage only if the differences meet the VRIO criteria

Mission

Objectives

Internal Analysis External Analysis

StrategicChoice

Business Level Strategy

Corporate Level Strategy

Cost leadership

Product differentiation

Bases for Product Differentiation Definition Example

Attributes of the product or service

preferences are created by actual differences in the tangible product or service offered by the focal firm vis-à-vis competitors’ offerings

• product features• product complexity • timing of product introduction • location

Firm-Customer relationship preferences are created as the focal firm develops and exploits relationships with customers based on what the focal firm’s target customers want

• Product customization• Consumer marketing• Product reputation

Firm Linkages preferences are created as the focal firm combines the competencies of different functions within or across organizations to produce tangible and/or intangible differences between the focal firm’s offerings and those of competitors

• linkages among functions within the focal firm

• linkages with other firms• product mix• distribution channels• service and support

Bases for Product

Differentiation

Product Attributes

Firm-Customer

Relationship

Firm Linkages

The notion of a base of differentiation is important because it allows a firm to focus its efforts on creating and exploiting a particular difference between its products and competitors’ products. Managers need to understand their own bases of differentiation and the bases of differentiation of competitors so that they can make informed strategic choices

Valu

eabl

e Threat of entryThreat of rivalryThreat of substitutesThreat of suppliersThreat of buyers

Rare If the company

has established a differentiated product, which implies that the product is rare

Imita

bilit

y Easy to duplicate. Such as product featureMaybe costly to duplicate. Such as Product mix, links with other firm, product customizatio, product complexity, consumer marketingCostly to duplicate. Such as links between functions, timing, location, reputation ,distribution channels ,service and support

Org

aniz

ing . Organizational

structure, management control systems, and compensation policies can all be managed to encourage customers to have a preference for the focal firm’s products and/or services

Product differentiation can neutralize the threats of the forces mentioned in the Five Forces Model

If a product differentiation strategy is costly to imitate, the firm can reasonably expect to enjoy a competitive advantage.

Here are how the implementation of V-R-I O to Product Differentiation

CASE STUDY

Theory

Background

Facts

Key issues

Analysis

Course of action

Recommendation

Company Snapshot

Stores (2010 data)

% franchised

Public/Private

Headquarter

CEO

Employees

International

Internet Ordering

2007 Sales

3,646 612 company-owned 2,280 domestic franchise 754 international franchise

83%

Public

Louisville

John Schnatter

16,336

Yes

Yes

USD 504 million

• John Schnatter opened the first Papa John’s

in 1985

• Sold its first franchise in 1986

• Initial Public Offering on June 8,1993

• Opened its first international restaurant in

1998 through acquisition of “Perfect Pizza”

in UK.

• #1 in American Customer Satisfaction Index

from 1999-2008

US Pizza Industry

There are more than 65,000 pizza restaurants in the United States $36.286 billion worth of pizza was sold in the US in 2010 45% of pizza is ordered for carry out, 36% for delivery, and 20% for dine-in

The “Big 4” controls some 31% of the American pizza industry. But it is still the independent chains that make up the majority—51.66%–of all pizza sales in the United States

Type of Pizza• Traditional Crust Pizza: The crust is not too thick

and not too thin. Usually it is created by rolling the dough into a round circle then topping it with sauce and cheese.

Deep Dish Pizza: A thick crust and dense toppings usually characterize deep-dish pizza, also known as pan pizza.

New York Style Pizza: The crust of this pizza tends to be much thinner than traditional and deep dish.

Channels of Distribution• Sit-Down Dining - custom pizzas made for in-

restaurant diners• Typical Pizza Restaurant Establishments: Pizza Hut

Red Roofs, Independents • Delivery - custom pizzas made, baked and delivered

by restaurant personnel to call-in customers• Typical Pizza Restaurant Establishments: Domino’s

Pizza, Pizza Hut, Papa John’s • Carry Out - custom pizzas made and baked for walk-

in or call-in customers to pick up • Typical Pizza Restaurant Establishment: Little

Caesars• Take ‘N Bake - custom pizzas made for walk-in

customers who then take the pizza home to bake themselves at their own convenience• Typical Pizza Restaurant Establishment: Papa

Murphy’s

US Pizza Industry

Theory

Background

Facts

Key issues

Analysis

Course of action

Recommendation

Element Facts Year

Technology The first pizza company with online ordering & text messages ordering 2001 & 2007

Menu • Pan Pizza• Added desserts to their carryout & delivery menu and chocolate pastry delight

2006 & 2008

Company growth • High-quality pizza with side items. Proprietary blend of pizza (Menu)• Lower operating cost & efficient QC center (Efficient Operating System)• Training programs for corporate members & franchisee, performance-based financial

incentives (Commitment to Team Member Training and Development)• National advertising campaign, restaurant level-marketing, direct-mail, store-to-door

couponing, community oriented activities, cross marketing activities with third party companies, sponsorship (Marketing)

• Attract franchisee with experience in retail business and financial resources to open multiple location. Assistance in restaurant operations

2007

Cost Management

• Net property & equipment value $2 million & property lease $22.4 million. Leasing building space provide the flexibility to move locations quickly

• Leased the trailers used to distribute ingredients• Cheese contribbute appx 35-40% of food costs• Partnered with a third-party entity formed by franchisee, BIBO Commodities, Inc. To

reduce cheese price volatility

2007

Element Facts Year

Operational Support System

• Created Operation Support Service and Training (OSST) for training & development of team members

• Printing company for high-quality service

2007 & mid-90s

Community Affairs • Sport team sponsorships• College scholarships ($5 million)• National FFA, Cerebbral Palsy K.I.D.S Center, Children Miracle Network

Marketing Partnerships

• Coca-Cola (sole supplier in Papa John’s store)• Endorsement • Blockbuster Video (30-day trial of free Blockbuster Video online)

Up to 2011,

Industry • Pizza industry is a mature and saturated industry• Highly competitive, cost of entry was relatively low and produc

differentiation was difficult

“By using a combination of internal and external resources, Papa John’s was determined to not compete with its competition on price. Focusing on quality product, active participation in the local communities, and product branding enabled Papa John’s to hold its own with the other pizza chains” – excerpt from the case study

Theory

Background

Facts

Key issues

Analysis

Course of action

Recommendation

(in thousands, except per share data0 Year Ended

Dec. 30,

2007Dec. 30,

2006Dec. 25,

2005Dec. 26,

2004Dec. 28,

2003

Income Statement Data 52 weeks 53 weeks 52 weeks 52 weeks 52 weeks Domestic revenues: Company owned restaurant sales $ 504.330 $ 447.938 $ 434.525 $ 412.676 $ 416.049

Variable interest entities restaurant sales 7.131

7.359 11.713 14.337 -

Franchise royalties 55.285 56.374 52.289 50.292 49.851

Franchise dand development fees 4.758

2.597 3.026 2.475 1.475

Commissary sales 399.099 413.075 398.372 376.642 369.825 Other sales 61.820 50.505 50.474 53.117 48.541 International revenues:

Royalties and franchise and development fees 10.314 7.551 6.529 5.010 3.810

Restaurant and commissary sales 20.860 15.658 11.860 10.747 10.572 Total revenues 1.063.597 1.001.057 968.788 925.296 900.123 Operating income 52.047 97.955 72.700 36.632 55.353

Investment income 1.446

1.682 1.248 639 672

Interest expense (7.465) (3.480) (4.316) (5.313) (6.851)

Income from continuing operations before income taxes and cumulative effect of a change in accounting principle

46.028 96.157 69.632 31.958 49.174

Income tax expense (13.293) (33.171) (25.364)

(12.021)

(13.440)

Income from continuing operations before income taxes and cumulative effect of a change in accounting principle

32.735 62.986 44.268 19.937 35.734

Income from discontinued operations, net of tax - 389 1.788 3.134 3.242

Cumulative effect of accounting change, net of tax -

- - -

(413)

Net Income $ 32.735 $ 63.375 $ 46.056 $ 23.071 $ 38.563

Financial results:• Total revenue CAGR

was 4.3%• International Revenue

contributed the most of the average growth (21.3% )than Domestic Revenue (3.9%)

• Operating Income and Net income had been declining for the last 4 years on average by -1.5% and -4.0%

Stock performance:• The performance of overall F&B business has been very poor

compared to the overall growth in stock indices• Despite a better performance compared to its peer in the industry

(CAGR 10%)but Papa John’s stock also under-performing compared to the overall stock indices

• Meaning, Papa John’s investor would create more wealth investing in other company than pouring their money in Papa John’s

CAGR

CSRP total Returns IndexDes-02 Des-03 Des-04 Des-05 Des-06 Des-07 5

years4 years

Papa John's International, Inc 100,0 116,7 120,7 213,1 206,3 161,0 10,0% 8,4%

Nasdaq Stock Market (US Companies) 100,0 146,0 160,0 167,8 180,8 197,6 14,6% 7,9%

NASDAQ Stocks (SIC 5800-5899 US companies) 100,0 137,8 202,4 209,4 225,5 150,3 8,5% 2,2%

eating & drinking places

Stock performance:Papa John’s stock even performed terribly after 2007. Loosing its value from 2005 by 8% while the restaurant industry has grown 60% against 2005

Key Issues:• Papa John’s had enjoyed only incremental growth in the new century

(2000-present)• Schnatter wanted to see Papa John’s return to the days when it opened

200 to 300 stores a year• Restaurant analysts belived that pizza industry is a mature and

saturated industry• Despite the growth in revenue (especially from overseas) the company

experience declining operating income meaning that the operating expense has grown faster than the revenue

• 2010 stock performance compared to 2005 & 2007 showed that the company is destroying is shareholders wealth

• Learning from Papa John’s 2010 annual report, the company international operation suffered loss for several years

Theory

Background

Facts

Key issues

Analysis

Course of action

Recommendation

Value Chain Activity Value for Customer

Primary

Inbound logistic • Online sales account for USD 400 million (2007). Papa John’s revenue in 2007 was USD 1.063 billion

Operations Store located in prime areas supported by commissaries as its suppliers

Outbound logistic Use delivery van

Marketing & sales • National advertising campaign through television, print media, internet, store-to-door coupon, direct mail and in-store marketing

• Local communities sponsorship• CSR program in the form of scholarship• Pan Pizza proprietary & dessert

Service • Customer service available online and via telephone

Secondar

y

Procurement • BIBP Commodities procure the cheese for Papa Johns’s• 10 regional Commissaries supplies Papa John’s store nation wide

Technology development • Papa John’s use IT and text messages for customer order• Also use IT & mobile technologies for promotional services

Human resources management Papa John’s operates Operation Support Service and Training (OSST) for its human capital development

General adminsitration

Papa John’s Value Chain

V-R-I-O

Resources/Capabilities

Is it Valuable?

Is it Rare?

Costly to Imitate? Organizing

Inbound Logistic Yes No No

Operation Yes No No

Outbound Logistic Yes No No

Marketing Yes No No

Service Yes No No

Procurement Yes Yes No

Technology development Yes No No

HRM Yes No No

GA

V-R-I-O Analysis:• Papa John’s

Papa John’s value chain analysis using the V-R-I-O shows that actually the company does not have a strong competitive advantage against the competition thus lack the ability to create value.

Business Level Strategy

What is it?Action used by the firm to gain a competitive advantage by exploiting core competencies in specific product markets

• Papa John’s applies differentiation strategy as its business-level-strategy

• They reject the idea of competing in price

• Their focus is on customer experience with Pizza made out of better ingredients & prepared better thus the marketing slogan came about (Better Inggredients, Better Pizza)

What about the products? Do Papa John’s products own an

edge compared to its competitors?

Papa John’s products•Create your own pizza & specialty pizza •All pizzas are made from good quality dough (better ingredients)•Each pizza accompanied by special garlic sauce and 2 pepperoncinisPizza•Chicken wings, chicken strips, breadsticksSides•SoftdrinksDrinks•Applepie, cinnapieDesserts•Dipping sauces, pepperoncinis, parmesan cheese, crushed red pepperExtras

V-R-I-O

Products Is it Valuable?

Is it Rare?

Costly to Imitate? Organizing Conclusion

Pizza Yes Yes No Yes Despite its rarity, Papa John’s pizza is not costly to imitate

Sides Yes No No Yes Papa John’s side dishes can be found anywhere else

Drinks Yes No No Yes No differentiation at all

Desserts Yes Yes No YesThe dessert is quite rare but not costly to imitate and the variation is not enough

Extras No Yes No YesRare but not too valuable as they’re considered to be “extras” & cannot produce too much value

Despite its Pizza uniqueness, Papa John’s products are not unique enough to be considered sustainable

And how do the valuable activities stand on the scale?

Are they rated high?

Likert Scale

Valuable Activities Scale 0-3 Reason

Commissaries/Centralized quality control

2 Having a regionalized commissaries allow the company to control its stock low (not having too much stock per store), maintain quality control

Operation Support Service Training (OSST)

1Nowadays, a training center for franchisee and staffs are very common in the industry thus having OSST does not mean give too much edge for the company. But the existence is definitely necessary

BIBP Commodities, Inc3

This is very important for the company since cheese is one of the main ingredients for Pizza and in the case of price increase the company cannot immidiately raise their prices thus having a stable purchasing price of cheese is necessary. And not many companies have this

Internet & mobile technology 1

Papa John’s is one of the pizza company that generates 80% of its sales through internet or mobile technologies but this technology is not distinctive and already applied by other companies in the industry

Pan Pizza, Dessert3

The pizzas are not sold cheaper than its competitor because Papa John’s uses better ingredients and prepared the dough seriously. Despite its quality, the menu or taste is somewhat similar to any pizza available in the market

Franchise system 1 Franchise has contributed to the firm expansion but the system itself is very common and has beem practiced by so many players

Conclusion on the Analysis

• Papa John’s Key valuable activities are not considered to be distinctive or special thus the company does not have a sustainable competitive advantage

• Despite the uniqueness of the products itself (better ingredients, better pizza), the startegy seems to be not to costly to duplicate

• The firm implement its strategy by doing 2 major activities:• Focus on product quality (Better Ingredients, Better Pizza)• Marketing Campaign through advertising, publicity, etc• Expanding through franchise and expanding internationally

• Its international strategy seems not to work out very well. The number showed that the international business experienced loss for several consecutive years

Theory

Background

Facts

Key issues

Analysis

Course of action

Recommendation

Determine the threats

Determine the industry

• MatureType of industry

•Earnings and sales grow slower in mature industries than in growth and emerging industries•earnings may be stable, growth prospects are few and far between

Characteristic

•The company can differentiate established products by “refining” the product - new and improved•Or differentiate by offering new levels of service to accompany the product

What can the company do?

Is the product rare?

The answer to the question of rareness can safely be assumed at this point in the analysis. The assumption is that Papa John’s must establish a differentiated product, which implies that the product is rare

What about to cost to imitate?

If a product differentiation strategy is costly to imitate, the company can reasonably expect to enjoy a competitive advantage.

Cost to imitate? Strategy Reason

Easy Product features

May be costly to imitate • Product mix• Links with other firms• Product customization• Product complexity• Consumer marketing

Usually costly to imitate • Links between functions• Timing• Location• Reputation• Distribution channels• Service and support

Key points for Papa John’s consideration

• Papa John’s weaknesses in the industry are: the business does not have a difficult barrier to enter. Anyone can open a pizza joint and being a food industry meaning that customers have a lot of choice of substitutes in the market

• The industry itself is mature meaning that in order to have an edge, the company must differentiate its level of services and refine its existing products

• In order to have a product which is costly to imitate than Papa John’s must improve its link between functions, build brand reputation, conduct innovation in its distribution channels and service support

Background

Facts

Key issues

Analysis

Course of action

Recommendation

Let’s revisit Schnatter goals

Opening 200-300 stores per

year

4,000 stores in 5 year from

2007

6,000-7,000 worldwide

Reduce company-run

stores

Ensure steady stream of revenue

despite difficult environment

How the firm plan to bring about?

Internationa

l Expansion

•Partner with local producer•Franchise•Accomodate sit-down dining areGrow &

Maintain domestic markets

•Co-branding effortsDive

rsification

•Develop or acquire additional restaurant chain

Papa John’s sets-out these strategy to achieve its goals (stated previously)

Goals Critics Advise

International Expansion

Despite its experience in international market, the opportunity looks very promising but the company will have to sacrifice its identity as a carry-out & delivery pizza restaurant

• The company should maintain its core values of producing quality pizza at a premium price and its business model which is a carry-out & delivery

• Despite the lure of international opportunity, the company should refrain from going into asian market since the characteristic are very much different. Other option would be to focus on North America (Canada & Mexico) which share resemblance

Maintain domestic market

Reducing company-run store would turn disastrous because the company will lose its sense of the business.

• The company should maintain a healthy ratio between company-run & franchisee store because it needs to make sure that the franchisee business remain profitable

• Co-branding with renown brand

New business (acquisition or development)

• Acquisition, based on various studies often failed because the differences in the culture and over-pricing the value of acquiree

• If the business is totally different from Pizza business then the company needs to acquire new knowledge in the new industry

• Acquisition can be done for expansion to international market. By acquiring brand that already established in the international market. It can be a pizza restaurant or any restaurant business

Critics to Company’s Goals

Strategy Implementation ExampleNew & improved products • Pizza with high quality inggredients,

imported inggredients• New line of esserts• Italian beverages• Health concious

• Original Pizza, the one that originates from Italy

• Chocolate melted, tiramisu cake, cheese cake

• Cappucinno, lattes• Products which contains low calorie,

fresh ingredients & healthy

New level of service and support Catering services For private parties or birthday party

Links between functions Store expansion through tripartite (Bank, the company & franchisee)

Using the company’s guarantee, help franchisee expand their business through stores opening

Location Expand to Canada & Mexico. Market that resembles US.

Open new franchise

Distribution channels Modern outlet (supermarket) Sell “create your own pizza” and “ready to make pizza” in supermarkets

Reputation Health conciuous, not only better Pizza Marketing campaign that focus on healthier Pizza, not only better

Business-Level Strategy Recommendation

Strategy Implementation ReasonOrganizational Structure • U-form

• Not too many layers• Profit oriented regional business area

Eash business manager, must be responsible for the profitability of their respective area. Not only that, they also must have the knowledge to expand their business locally

Management Controls • KPIs not only based on financial indicators but also on business growth & innovation

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

Compensation Policies • Rewards for successful experimentation

• Absence of punishment for failed experimentation provide strong incentive to be creative

Compensation policies should be structured to reward managers and employees for cooperating within cross functional teams and being creative in the process

Business-Level Strategy Recommendation

The Organization question of the VRIO Model is perhaps even more important with a product differentiation strategy because of the relationship between the company and customers

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