Firms can increase profits by either lowering the cost of production or increasi
ID: 461376 • Letter: F
Question
Firms can increase profits by either lowering the cost of production or increasing the value of their product (and charging a higher price). In order to do the latter, firms must differentiate their product in some way so that consumers value it more than the products made by competitors and are therefore willing to pay a premium price for it. (a) Name an international firm that follows the differentiation strategy. (b) Name one that follows the cost-reduction strategy. (c) Which of these strategies will work best for a firm that is selling furniture in the global market? Explain your answer.
Explanation / Answer
(a) Apple is a firm which follows differentiation strategy. It makes premium gadgets for discerning users, using its own hardware and proprietary software, which is more often have interoperability issues with other operating systems. However, Apple stands out in the market because of its outstanding quality and premium feel of the product. Apple is successful because of its strongly focused differentiation strategy.
(b) Walmart is a firm that follows cost-reduction strategy. Walmart is successful in retail industry, because it has the capacibility and scale to squeeze the best bargains from its suppliers and this makes it capable of offering the lowest prices to its customers. Its low cost strategy is behind its success and the scale at which it operates.
(c) Selling furniture in the global market will require a hybrid of both the strategies. Different markets have different price and demand elasticity for different products. The firm should adopt the strategy according to particular market. In a particular market, where furniture is viewed as item of luxury and people prefer to have very high quality and premium products, by paying premium price, then the firm should follow differentiation strategy in that market. In other markets, where people purchase furniture as item of necessity, and the product is more commoditized, then the firm would be more successful by following cost-reduction strategy in that market. It also depends upon the market segment and the size that the firm is targeting and accordingly the firm should decide the strategy to pursue that fits its objective.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.