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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. My Accounting Course: What is a Differentiation Strategy? The risks related with a differentiation strategy comprise imitation by competitors and changes in customer tastes. This is accomplished by offering a variety of types of product. The typical risks of a cost leadership strategy include a. the inability to balance high differentiation and low price. 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. Specifically, firms may use surveys, focus groups and other data-gathering tools to gauge the reaction of likely buyers to a marketing promise or focus, reports Hubspot. This can occur as buyers become more sophisticated; 3. Although the Cournot competition in the market place is not a game in the mathematical sense of the word, it does produce the characteristics of a dynamic game. This creates more pressure to stimulate customer demand and to maintain a reasonable sales price to drive revenue and profit. Why Is the Presence of Small Businesses Important for Large Businesses. In such a situation, a firm fails to implement either the differentiation or the cost leadership strategy effectively. The differentiation strategy itself becomes a strategic weapon for the firms to defend their market share. Since the market leader has the highest brand recognition in the market, competitors will choose to imitate and try to improve the overall value-added to the customer. The cost difference between low cost competitors & the differentiated business is too high C. Obsessive cost cutting can shrink other competitive advantages … 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. Additionally, various firms pursuing focus strategies may be able to achieve even greater differentiation in their market segments. The Dimond effect is a risky strategy. 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Johnson & Johnson’s Vistakon Inc. demonstrated the value of taking risks when it took a chance on unproven optical technology. Small firms are always under pressure to allocate marketing resources efficiently among their product offerings. The main objective of implementing a differentiation strategy is to increase competitive advantage. Additionally, various firms pursuing focus strategies may be able to achieve even greater differentiation in their market segments. 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. Share this: Apple is an American corporation that designs, manufactures and sells electronics, computer hardware and software, and personal computers. Risk Reduction Consumer research can help to reduce the risks of product differentiation. The risks associated with a differentiation strategy include imitation by competitors and changes in customer tastes. For example, global pricing consultancy Pricing Solutions points out how retail giants Walmart and Amazon differentiate themselves on the basis of their operational excellence – their supply lines are watertight so they will always have in stock whatever product you need. In this way, a dimension of competition can be created through the conduct of the sales effort. The organization must train its workers and managers. Enter your account data and we will send you a link to reset your password. Moreover, diverse firms pursuing focus strategies may be able to achieve even greater differentiation in their market segments. Additionally, various firms pursuing focus strategies may be able to achieve even greater differentiation in their market segments. 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. It is possible that this gives rise to a game called Anti-Differentiation Game in which deviations from the pure Nash equilibrium are observed. It also must be a product which has to be purchased regularly in order to maintain the level of momentum. To make the Dimond effect occur, the market has to be able to initially be reached in some considerable manner by a product, for which the market share is then increased. b. production and distribution processes becoming obsolete. A first risk to differentiation strategy is the possibility of other firms entering the market and lowering prices to keep from losing customers. Basically, it is concerned with satisfaction and utility. My recommendation is to include the assessment and ranking of possible risks and risk responses in your differentiation strategy. A distinctive capabilityis an ability to do something no other competitor can … The Dimond effect is a result of the product fad to which the economy is connected. Risks: Porter assets that there are risks to the differentiation strategy. It also must be a product which has to be purchased regularly in order to maintain the level of momentum. A supermarket may set aside a special section for high priced items and, as a result, becomes a high-end shopping area. The greatest dangers, however, may be the market leader’s need to manage its evolving portfolio of market segments. One risk is that customers will sacrifice some of the features, services, or image possessed by a unique service because it costs too much. However, the differentiation strategy is not without its risks: If the basis for differentiation is easily imitated, it will not lead to a sustainable advantage. 14. In addition, the organization must operate with zero defects. But especially at the point of purchase, their expectations are shaped in large part by advertising, label copy and other promotional messages. An example of this would be a furniture store which also has an attached department store. One risk of the differentiation strategy is that: c. the firm may offer differentiated features that exceed the customers’ needs. A network of selling and referral links allows the Corday strategy to become a network of support with fragmented pricing strategies. The deterministic outcome of the Cournot game is a high level of output since competitors take into account not only their own production costs but also the market leader’s costs in determining their own production levels. 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. 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