risks of differentiation strategy

Competitive Risks of the Differentiation Strategy - This section defines some of the risks faced by firms that select a differentiation strategy. This can occur as buyers become more sophisticated; 3. Buyers thus sacrifice some of the features, services, or image possessed by the differentiated firm for large cost savings; 2. There would be similar reactions among wholesalers and other members of the supply chain. What Is the Meaning of Mass Customization? Here you'll find all collections you've created before. The Dimond effect is a result of the product fad to which the economy is connected. The aim of total quality does not vary by firm, only by its size and the market it operates in. The greater the size of the market, the larger the degrees of implication of the strategy. Risks associated with a differentiation strategy The major risks associated with a differentiated strategy center on the difference between added costs and incremental prices. Broad differentiation is a strategy that is applied across an industry, appealing to a broad range of shoppers. When you are making your product different, there may be multiple risks associated with the differentiation strategy. The big risk when using a differentiation strategy is that customers will not be willing to pay extra to obtain the unique features that a firm is trying to build its strategy around. The organization must establish policies, procedures, and goals of continuous improvement. In these situations, managers may need to reevaluate the product mix to make sure the firm gets a reasonable return on its overall marketing investment. 4 Exploring Strategic Risk: A global survey The greater the size of the market, the larger the degrees of implication of the strategy. The different factors on which the process is implemented include: It also must be a product which has to be purchased regularly in order to maintain the level of momentum. The risks associated with a differentiation strategy include imitation by competitors and changes in customer tastes. Many consumers perceive the product as equivalent to alternative products offered in the marketplace at a lower price. The result can be summed up by the following relationship: L = P R Where L = level of output And P = price per unit of output The Cournot model has as a consequence that any price above a competitive price will be quickly reduced until it reaches the competitive level. In addition to a product or service being distinguished on the basis of the price offered or the characteristics of the product being sold, it may be distinguished by the place at which it is sold. For example, marketers might learn that while large numbers of people like the idea of fat-free pies and cakes, only a handful actually choose these options when offered traditional baked goods. Edwards Deming: The Aim Of Total Quality Contains Three Points: Price Of The Product That Makes The Organization Viable. To use social login you have to agree with the storage and handling of your data by this website. When company executives were led to an inexpensive method of manufacturing contact lenses they seized the opportunity. (function(){for(var g="function"==typeof Object.defineProperties?Object.defineProperty:function(b,c,a){if(a.get||a.set)throw new TypeError("ES3 does not support getters and setters. See slide 26. One risk of the differentiation strategy is that: c. the firm may offer differentiated features that exceed the customers’ needs. The big risk when using a differentiation strategy is that customers will not be willing to pay extra to obtain the unique features that a firm is trying to build its strategy around. If it loses its share after a while, then it will retrieve its resources and those of competitors the only cost of which will be the initial minimum loss of resources. strategic risk that doesn’t just focus on challenges that might cause a particular strategy to fail, but on any major risks that could affect a company’s long-term positioning and performance. Enter your account data and we will send you a link to reset your password. A key risk associated with a differentiation strategy is: A. [CDATA[ The likely scenario is that there will be the pre-existing product dimensions like price, service, and features which define the strategic policy In order to improve the brand reputation and differentiation product offer, the cost of production, the size of the market, and the number of buyers available must be determined. Thus a differentiation strategy helps create barriers to entry that protect the firm and its industry from new competition. By matching the market leader, a differentiation strategy will then only modify the price factor. A supermarket may set aside a special section for high priced items and, as a result, becomes a high-end shopping area. This is a particularly significant risk for moderately costly goods, like a dishwasher that breaks down after being marketed as more durable than competition. See Additional Notes g. Few formalized rules and procedures. But especially at the point of purchase, their expectations are shaped in large part by advertising, label copy and other promotional messages. The product differentiation process may be as simple as redesigning of packaging to introducing a brand new functional feature in a product. For example, buyers for a retail drugstore chain would probably reject a deodorant that differs from other brands only because its package has an unusual shape. Because of this, your marketing, sales and service costs are often higher as well. One risk of the differentiation strategy is that c 45. Dimond Effect: A Risky Strategy: The Dimond effect only pays off for a company if it is able to increase its share and maintain it over time. The cost differential between low-cost competitors and the differentiated firm becomes too great for differentiation to hold brand loyalty. In such a situation, a firm fails to implement either the differentiation or the cost leadership strategy effectively. Nonetheless, the effect on the industry is that companies will be forced to discontinue their production at the set prices. This situation is similar to the gris-gris effect of offering a discount toothpaste in a larger volume. b. The motivation is that by attracting more customers, larger profits are to be obtained. 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The greater the growth of the market, the larger the degrees of implication of the strategy. Research does suggest that a differentiation strategy is more likely to generate higher profits than is a low cost strategy because differentiation creates a better entry barrier. The key aspect of the Cournot model is that both goods will be produced only if the price is above the minimum at which the individual profit-maximizing firms will cease producing. If products fail to deliver on the promises made to differentiate them, buyers may be disappointed and angry. Below. A differentiation strategy can only be successful by having a larger share of the existing market then competitors. This is an example of a Nash-Cournot optimal game since the firms are altering the price factor in order to maximize profits. Additionally, various firms pursuing focus strategies may be able to achieve even greater differentiation in their market segments. Corday is a contrasting node since it sacrifices profits in order to attract new customers, thus creating a new dimension for competition in the market. In this case, the market leader will be the firm on top, and the current leader as well as others will try to match each other’s strategy. Risk mitigation refers to the process of planning and developing methods and options to reduce threats—or risks—to project objectives. The process works well when it is based on tangible, meaningful differences, like the quality of a food's ingredients or the effectiveness of a drug. This is an example of a Nash-Cournot optimal game since the firms are altering the price factor in order to maximize profits. The risks associated with a differentiation strategy include imitation by competitors and changes in customer tastes. The organization must establish a base inspection for quality control. The likely scenario is that there will be the pre-existing product dimensions like price, service, and features which define the strategic policy. An example of this would be a furniture store which also has an attached department store. 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The effect of this type of regulation can be seen if the government regulates prices to such a level that they are set at the marginal cost. Corday is a contrasting node since it sacrifices profits in order to attract new customers, thus creating a new dimension for competition in the market. Consumer research can help to reduce the risks of product differentiation. Dimond-Pierce Effect: For The Price Of One, Differentiation Strategy: Death Of The Leader. It's a strategy that works better for larger companies than smaller ones. My recommendation is to include the assessment and ranking of possible risks and risk responses in your differentiation strategy. Costs are often informed by word of mouth and other information sources the adoption of sound principles an! The cost differential between the low-cost product and the differentiated firm becomes too great for differentiation to brand. 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