Dynamic product differentiation strategies: an examination of the interplay of firm and industry characteristics.

Technologically dynamic industries are characterised by the availability of ample differentiation opportunities. Implementing an appropriate product differentiation strategy is a critical determinant of entrant success in such industries. Firms typically have to engage in two sequential decisions. They need to first decide whether to differentiate and if they decide to do so, they need to choose between a horizontal and a vertical differentiation strategy. Despite the growing literature on the consequences of product differentiation strategy, limited attention has been paid to ascertaining the determinants of these dynamic decisions. We suggest that a complex interplay of firm-level (firm size and pre-entry experience) and industry (technology regime) characteristics impacts the choice of differentiation strategies. Empirical tests using multinomial logit models on data obtained from a census of all entrants into the personal computer industry between 1974 and 1994 support our theory.