Product differentiation: does it provide competitive advantage for a printing paper company?

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Doctoral thesis (monograph)
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Report / Helsinki University of Technology, Laboratory of Paper Technology. Series A, 17
The aim of this thesis was to contribute to the knowledge and understanding of product differentiation in the context of printing papers. The motivation for this thesis emerged from unsolved problems encountered when the author worked in two product differentiation projects at two different paper mills in Finland in the 1980's and 1990's. The number of non-standard printing papers such as MFC, SC A+, SC A++, SC B, FCO and WSOP papers has been on the increase; this has resulted in additional complexity both for the producer and the customer. The differences between printing paper grades have simultaneously diminished and developing printing technology has reduced differences between paper grades. This study answers the following questions: What is product differentiation in the context of printing papers? Can product differentiation be used to improve the competitive advantage of a printing paper firm? If so, how should product differentiation be organized and applied in practice as part of a firm's strategy? A holistic view of the research area was chosen to increase understanding of this increasingly important and very complex area. The theoretical part first operationalises the key concepts which are important in the phenomenon of product differentiation in general and in this study in particular, and then examines various level business strategies. This study primarily follows a resource-based approach. Empirical data was collected through 37 in-depth personal interviews in 1999 and 2000. The sample represents four Finnish paper industry companies, its customers (publishers, printers, merchants), its suppliers (both machine and chemical), as well as consultancy companies, the Finnish Technology Agency and a bank. The sample of paper industry experts is cross-functional. It covers management, business development, marketing and sales, production, R & D, technology and procurement. The study applies qualitative research methods and uses conceptual and action analytic research approaches. Product differentiation of printing papers is today a poorly managed, complex process. It is rather a random, unintegrated activity, separated from the business strategy. Product differentiation has mainly been driven by eroded profits at a paper machine line; it is not an integrated part of a customer's strategy. The bond between a differentiated product and a customer's process is rather weak: customers tend to change to better quality standard products when a downturn starts and price difference diminishes. This finding suggests that product differentiation in the context of printing papers is rather a product proliferation, a wasted opportunity, than a real value-adding action. Other important drivers for product differentiation were found to be customer needs based reasons: a new end-use application, and price. New paper manufacturing technologies, new minerals and chemicals function rather as the strategic means to enable product differentiation than as real drivers. One motive or driver is not in itself strong enough to cause product differentiation but we need many of them. We also need a support process, high level strategic marketing skills, updated information of a dynamically changing business environment and strong cost control. The research findings indicate that the role of initiator in this process is gradually moving from the paper producer towards the customer. Product differentiation used to be strongly manufacturer's technology pushed; presently it is both manufacturer's technology pushed and customer technology pushed. In the future it will continue to be technology pushed but increasingly the advertiser and the consumer will pull. The findings of the research also indicate that value-based pricing should be considered for differentiated printing papers as an alternative to traditional cost-based pricing. The most important internal barrier for product differentiation is the unclear position of a differentiated paper compared with the existing product portfolio reflecting a lack of strategy. Timing in relation to a business cycle is important when launching a differentiated product into a market. The optimal time is the start of an up cycle. The cost leadership strategy will continue to remain the leading strategy for a printing paper industry company. Product differentiation will function in a supporting but important role. The difference in product differentiation is primarily made through knowledge, skills and capabilities. The thesis research gives a new meaning to product differentiation of printing papers. It also gives recommendations to paper industry management about what to take into consideration, avoid and strengthen when starting a product differentiation project. A solution must be tailored to a purpose because the starting point for each product differentiation project will vary. The main claim of this dissertation is: Product differentiation – as defined in this thesis – can provide competitive advantage for a printing paper company if it is based on the coordinated use of various knowledge, skills and capabilities within the firm. Product differentiation should start with an understanding of customers' earning logic and future needs. If based on intangible assets, product differentiation is not a sustainable competitive advantage unless it is an integrated element of a customer's strategy. Brand building could be more effectively used to support product differentiation.
product, product differentiation, competitive advantage, printing paper, paper industry, resource-based view
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