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Complete Guide To Differentiation Strategy Risks

The risks associated with a differentiation strategy include imitation by competitors and changes in customer tastes. Additionally, various firms pursuing focus strategies may be able to achieve even greater differentiation in their market segments.

The greatest dangers, however, may be the market leader’s need to manage its evolving portfolio of market segments.

Cournot Effect

A first risk to differentiation strategy is the possibility of other firms entering the market and lowering prices to keep from losing customers. Since most differentiation strategies entail high production costs, the market leader facing this type of risk is likely to lose market share to a lower cost producer, since it cannot gain market share without offering a price discount. The entry of such firms, then, restricts the market leader’s profits to a competitive level.

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.

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.

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

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.

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.

Cooper-Kahn Effect

Cooper and Kahn posed this new model on the oligopoly price strategy of collusion or non-collusion of competitors.

The oligopoly price is different in that it is not a result of competition between the firms directly but, as Cooper and Kahn suggest, from the government. For example, collusion occurs in the tobacco industry where the government sets the level and kind of taxes on tobacco and cigarette firms and dictates the price they can charge. 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.

Nonetheless, the effect on the industry is that companies will be forced to discontinue their production at the set prices. This is what happens when there is an excise placed on production (most recently on airline flights).

Cordray: Anti-Differentiation Strategy

The Corday strategy is aimed at the competitors through the courting of the non-buyers.

This strategy is aimed at the weaker competitors, hence can be viewed as a differentiated strategy integrated with a small-world network.

It is possible that this gives rise to a game called Anti-Differentiation Game in which deviations from the pure Nash equilibrium are observed.

Corday: Anti-Differentiation Strategy The Corday strategy is aimed at the competitors through the courting of the non-buyers. This strategy is aimed at the weaker competitors, hence can be viewed as a differentiated strategy integrated with a small-world network. It is possible that this gives rise to a game called Anti-Differentiation Game in which deviations from the pure Nash equilibrium are observed. The motivation is that by attracting more customers, larger profits are to be obtained.

This is accomplished by offering a variety of types of product. The loser in this competitive game are the firms which specialize in one type of product as these firms lose market share. A network of selling and referral links allows the Corday strategy to become a network of support with fragmented pricing strategies.

Coordinate Dimension

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. A supermarket may set aside a special section for high priced items and, as a result, becomes a high-end shopping area. In this way, a dimension of competition can be created through the conduct of the sales effort. An example of this would be a furniture store which also has an attached department store.

As A Rule, a firm gains entry into the market when the goods offered are distinctive.

Many firms that may be interested in entering the segment will be able to do so when the goods offered by the firms are forced to become differentiated. As the number of products offered increases in the market, the product differentiation strategy becomes more profitable.

The differentiation strategy itself becomes a strategic weapon for the firms to defend their market share. In this case, the firm’s products are of entirely different types of quality.

Dimond-Pierce Effect: For The Price Of One

With the Dimond-Pierce effect, an increase in the cost of making each widget is offset by an increase in volume. This situation is similar to the gris-gris effect of offering a discount toothpaste in a larger volume.

In the case of Dimond-Pierce, a given mass of production (batch) can be made by different means. For example, the inputs used for the production of each batch may be altered by the firm.

In this case, the Dimond-Pierce effect suggests that firms will alter the production factors to maximize the output, not necessarily for the same production costs, but for the same profit-maximizing solution. The Dimond-Pierce effect is a result of efficient use of factors in production.

Differentiation Strategy: Death Of The Leader

Most differentiation strategies are aimed at establishing a “different” relationship with the existing customers, not necessarily at attracting new ones. A differentiation strategy can only be successful by having a larger share of the existing market then competitors. 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.

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.

By matching the market leader, a differentiation strategy will then only modify the price factor. In most cases, a price factor modification amounts to a bettering improvement for the product.

The likely scenario is that there will be the pre-existing product dimensions like price, service, and features which define the strategic policy

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. By matching the market leader, a differentiation strategy will then only modify the price factor. In most cases, a price factor modification amounts to a bettering improvement for the product. 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.

The greater the size of the market, the larger the degrees of implication of the strategy. The greater the growth of the market, the larger the degrees of implication of the strategy.

As a result, the differentiation strategy becomes an evolutionary game, involving the improvement of a product through matching it with the market leader’s price.

The strategic research approach to this game is to determine the benefits that each firm receives by choosing to alter its position in the product line. Firms can improve their profits by moving to an improved position which does not necessarily mean that it will be to the furthermost right.

This is an example of a Nash-Cournot optimal game since the firms are altering the price factor in order to maximize profits. 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 Dimond-Pierce effect is a result of efficient use of factors in production.

For the Dimond-Pierce effect to apply, the market must be able to be stretched. In this case, a firm will produce a large batch of the good and then break it up into smaller units. By doing this, the unit cost per unit decreases allowing it to sell for a lower price.

Dimond: Starburst

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. It also must be a product which has to be purchased regularly in order to maintain the level of momentum.

The Dimond effect is a result of the product fad to which the economy is connected.

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. 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.

The Dimond Effect Is A Risky Strategy.

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. It also must be a product which has to be purchased regularly in order to maintain the level of momentum. The Dimond effect is a result of the product fad to which the economy is connected. 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. 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. The Dimond effect is a risky strategy. Only by examining the long-term consequences of the strategy will tell if it is the correct one.

The Dimond effect is a risky strategy with uncertain results due to the high competitive environment

The Deming Effect: Prove It, Especially If It’s True.

The Deming effect refers to the adoption of sound principles throughout an entire organization.

Edwards Deming: The Aim Of Total Quality Contains Three Points:

  • Quality products on time
  • Quality products on time
  • Prices at which the product is satisfied

Price Of The Product That Makes The Organization Viable

The aim of total quality does not vary by firm, only by its size and the market it operates in. Basically, it is concerned with satisfaction and utility.

Quality Products On Time, And On Budget

In order to achieve the Deming effect, the goal of total quality must be achieved when there is a start to the process and at every stage of the production. In addition, the organization must operate with zero defects. In order to reach such a goal, this is what the organization must do:

  • The organization must train its workers and managers.
  • The organization must establish a base inspection for quality control.
  • The organization must establish policies, procedures, and goals of continuous improvement.
  • The organization must continually measure and analyze its performance.

Deming effect can only be achieved if all of the above are met.

 

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