PRODUCT

DIFFERENTIATION
PAPA JOHNS CASE
STUDY

Theory
Background
Facts
Key issues

Analysis
Course of action
Recommendation

Mission

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

Objectives

Internal Analysis

External Analysis

Strategic
Choice
Business Level
Strategy
Cost
leadership
Product
differentiation

Corporate
Level Strategy

FirmCustomer
Relationship
Product
Attributes

Firm
Linkages
Bases for
Product
Differentiation

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

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--vis competitors offerings

Firm-Customer relationship

preferences are created as the focal firm

develops and exploits relationships with
customers based on what the focal firms
target customers want

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 firms offerings
and those of competitors

linkages among functions within the focal

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

product features
product complexity
timing of product introduction
location
Product customization
Consumer marketing
Product reputation

Threat of
substitutes
Threat of suppliers
Threat of buyers

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

Easy to duplicate. Such as

product feature
Maybe costly to
duplicate. Such as Product
mix, links with other firm,
product customizatio,
product complexity,
consumer marketing
Costly to duplicate. Such
as links between functions,
timing, location,
reputation ,distribution
channels ,service and
support

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

Organizing

Threat of rivalry

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

Imitability

Threat of entry

Rare

Valueable

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

Product Differentiation
. Organizational
structure,
management control
systems, and
compensation
policies can all be
managed to
encourage customers
to have a preference
for the focal firms
products and/or
services

CASE STUDY

Theory
Background
Facts
Key issues

Analysis
Course of action
Recommendation

Company Snapshot
3,646
Stores (2010 data)

612
companyowned

2,280
754
domestic internationa
franchise l franchise

% franchised

83%

Public/Private

Public

Headquarter

Louisville

John Schnatter opened the first Papa

Johns in 1985
Sold its first franchise in 1986
Initial Public Offering on June 8,1993

CEO

John Schnatter

Employees

16,336

International

Yes

Internet Ordering

Yes

Opened its first international restaurant in

1998 through acquisition of Perfect Pizza
in UK.
#1 in American Customer Satisfaction Index

from 1999-2008
2007 Sales

USD 504 million

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 majority51.66%of
all pizza sales in the United States

US Pizza Industry

Type of Pizza

Channels of Distribution

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.

Sit-Down Dining - custom pizzas made for inrestaurant 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:
Dominos Pizza, Pizza Hut, Papa Johns
Carry Out - custom pizzas made and baked for walkin 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
Murphys

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.

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

Operational Support
System

Created Operation Support Service and Training (OSST) for training &
development of team members
Printing company for high-quality service

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 Johns store)

Endorsement
Blockbuster Video (30-day trial of free Blockbuster Video online)

Industry

Pizza industry is a mature and saturated industry

Highly competitive, cost of entry was relatively low and produc
differentiation was difficult

Year
2007 & mid-90s

Up to 2011,

By using a combination of internal and

external resources, Papa Johns 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 Johns 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

Income Statement Data

Domestic revenues:
Company owned restaurant sales
Variable interest entities restaurant sales
Franchise royalties
Franchise dand development fees
Commissary sales
Other sales
International revenues:
Royalties and franchise and development fees
Restaurant and commissary sales
Total revenues
Operating income
Investment income
Interest expense

Dec. 30,
2007
52 weeks
$

Income from continuing operations before income taxes and

cumulative effect of a change in accounting principle
Income tax expense
Income from continuing operations before income taxes and
cumulative effect of a change in accounting principle
Income from discontinued operations, net of tax

Cumulative effect of accounting change, net of tax

Net Income

Dec. 30,
2006
53 weeks

504.330 $
7.131
55.285
4.758
399.099
61.820

Year Ended
Dec. 25,
2005
52 weeks

Dec. 26,
2004
52 weeks

Dec. 28,
2003
52 weeks

447.938 $ 434.525 $ 412.676 $ 416.049

7.359
11.713
14.337
56.374
52.289
50.292
49.851
2.597
3.026
2.475
1.475
413.075
398.372
376.642
369.825
50.505
50.474
53.117
48.541

10.314
20.860
1.063.597
52.047
1.446
(7.465)

7.551
15.658
1.001.057
97.955
1.682
(3.480)

6.529
11.860
968.788
72.700
1.248
(4.316)

5.010
10.747
925.296
36.632
639
(5.313)

3.810
10.572
900.123
55.353
672
(6.851)

46.028

96.157

69.632

31.958

49.174

(13.293)

(33.171)

(25.364)

(12.021)

(13.440)

32.735

62.986

44.268

19.937

35.734

389

1.788

3.134

3.242

32.735 $

63.375 $

46.056 $

- (413)
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%

CSRP total Returns Index

CAGR
5 4
Des-02 Des-03 Des-04 Des-05 Des-06 Des-07
years 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)

NASDAQ Stocks (SIC 5800-5899 US
companies)

100,0

146,0

160,0

167,8

180,8

197,6 14,6% 7,9%

100,0

137,8

202,4

209,4

225,5

150,3 8,5% 2,2%

eating & drinking places

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 Johns stock also under-performing compared
to the overall stock indices
Meaning, Papa Johns investor would create more wealth investing
in other company than pouring their money in Papa Johns

Stock performance:
Papa Johns 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 Johns had enjoyed only incremental growth in the new century
(2000-present)
Schnatter wanted to see Papa Johns 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 Johns 2010 annual report, the company
international operation suffered loss for several years

Theory
Background
Facts
Key issues

Analysis
Course of action
Recommendation

Secondary

Primary

Value Chain Activity

Value for Customer

Inbound logistic

Online sales account for USD 400 million (2007). Papa Johns 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

Procurement

BIBP Commodities procure the cheese for Papa Johnss

10 regional Commissaries supplies Papa Johns store nation wide

Technology development

Papa Johns use IT and text messages for customer order

Also use IT & mobile technologies for promotional services

Human resources management

Papa Johns operates Operation Support Service and Training (OSST) for its human capital
development

General adminsitration

Papa Johns Value Chain

Resources/
Capabilities

Is it
Valuable?

Is it
Rare?

Costly to
Imitate?

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

Organizing

V-R-I-O Analysis:

Papa Johns

Papa Johns 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.

What is it?
Action used by the firm to gain a competitive advantage by exploiting core
competencies in specific product markets
Papa Johns applies differentiation
strategy as its business-levelstrategy
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)

Business Level Strategy

What about the products? Do

Papa Johns products own an
edge compared to its
competitors?

Papa Johns products

Pizza

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 pepperoncinis

Sides

Chicken wings, chicken strips, breadsticks

Drinks
Desserts

Extras

Softdrinks

Applepie, cinnapie

Dipping sauces, pepperoncinis, parmesan cheese, crushed red pepper

Despite its Pizza uniqueness, Papa Johns products are not unique enough to
be considered sustainable
Is it
Valuable?

Is it
Rare?

Costly to
Imitate?

Organizing

Conclusion

Pizza

Yes

Yes

No

Yes

Despite its rarity, Papa Johns pizza is

not costly to imitate

Sides

Yes

No

No

Yes

Papa Johns side dishes can be found

anywhere else

Drinks

Yes

No

No

Yes

No differentiation at all

Yes

The dessert is quite rare but not

costly to imitate and the variation is
not enough

Yes

Rare but not too valuable as theyre

considered to be extras & cannot
produce too much value

Products

Desserts

Yes

Extras

V-R-I-O

No

Yes

Yes

No

No

And how do the valuable

activities stand on the scale?
Are they rated high?

Valuable Activities

Scale
0-3

Commissaries/Centrali
zed quality control

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)

Nowadays, 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

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

Papa Johns 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

The pizzas are not sold cheaper than its competitor because Papa Johns 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 has contributed to the firm expansion but the system itself is very common
and has beem practiced by so many players

BIBP Commodities, Inc

Internet & mobile

technology
Pan Pizza, Dessert

Franchise system

Likert Scale

Reason

Conclusion on the
Analysis
Papa Johns 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

Threat of New entrants

It is easy for new pizza parlor or pizza business to set up

Threat of Rivalry
Small differences in terms of product amongst rival business. Each claim to have better products but customers perceiption is
various

Threat of Substitutes
Pizza is not a staple food. It is easy for customers choose other food

Threat of Suppliers
Our biggest concern is the supply & volatility of cheese price but this has been mitigated through the creation of procurement
center & hedging

Threat of Buyers
The firm does not have a highly differentiated product, customers can choose different pizza restaurant

Determine the threats

Type of
industry

Mature

Characteristic

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

What can the

company do?

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

Determine the industry

The answer to the question of rareness

can safely be assumed at this point in
the analysis. The assumption is that
Papa Johns must establish a
differentiated product, which implies
that the product is rare

Is the product rare?

Cost to imitate?

Strategy

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

Reason

If a product differentiation strategy is costly to imitate, the company can

reasonably expect to enjoy a competitive advantage.

What about to cost to imitate?

Key points for Papa

Johns consideration
Papa Johns 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
Johns 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

Opening 200-300
stores per year

4,000 stores in 5
year from 2007

Reduce companyrun stores

6,000-7,000
worldwide

Ensure steady
stream of revenue
despite difficult
environment

Lets revisit Schnatter goals

Papa Johns sets-out these

strategy to achieve its
goals (stated previously)

Internatio
nal
Expansion

Partner with local

producer
Franchise
Accomodate sitdown dining are

Grow &
Maintain
domestic
markets

Diversifica
tion

Co-branding efforts

Develop or acquire
additional
restaurant chain

How the firm plan to bring about?

Goals

International
Expansion

Maintain
domestic
market

New business
(acquisition or
development)

Critics

Advise

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

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

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 Companys Goals

Strategy

Implementation

Example

New & 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 companys 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

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
Strategy

Implementation

Reason

Organizational 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

THANK YOU