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Risks of Using a Differentiation Strategy

  • Uniqueness
  • Imitation
  • Loss of Value

Porter’s Five Forces Model – Effective differentiators can remain profitable even when the five forces appear unattractive.

  • Rivalry – Brand loyalty means that customers will be less sensitive to price increases, as long as the firm can satisfy the needs of its customers (audiofiles).
  • Suppliers – Because differentiators charge a premium price they can more afford to absorb higher costs and customers are willing to pay extra too.
  • Entrants – Loyalty provides a difficult barrier to overcome. Substitutes (trans. 4-26) – Once again brand loyalty helps combat substitute products.

3. Focused Low Cost– Organizations not only compete on price, but also select a small segment of the market to provide goods and services to. For example a company that sells only to the U.S. government. 

4. Focused Differentiation – Organizations not only compete based on differientation, but also select a small segment of the market to provide goods and services. 

Focused Strategies – Strategies that seek to serve the needs of a particular customer segment (e.g., federal gov’t).

Companies that use focused strategies may be able serve the smaller segment (e.g. business travelers) better than competitors who have a wider base of customers. This is especially true when special needs make it difficult for industry-wide competitors to serve the needs of this group of customers. By serving a segment that was previously poorly segmented an organization has unique capability to serve niche.

Risks of Using Focused Strategies:

  • Maybe out focused by competitors (even smaller segment)
  • Segment may become of interest to broad market firm(s)

5. Using an Integrated Low-Cost/Differentiation Strategy

This new strategy may become more popular as global competition increases. Firms that use this strategy may see improvement in their ability to:

  • Adaptability to environmental changes.
  • Learn new skills and technologies
  • More effectively leverage core competencies across business units and products lines which should enable the firm to produce produces with differentiated features at lower costs.

Thus the customer realizes value based both on product features and a low price. Southwest airlines is one example of a company that does uses this strategy.

However, organizations that choose this strategy must be careful not to: becoming stuck in the middle i.e., not being able to manage successfully the five competitive forces and not achieve strategic competitiveness. Must be capable of consistently reducing costs while adding differentiated features.