Page 263 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes 2. A second approach is to incorporate features that raise the performance a buyer gets out of
the product.
3. A third approach is to incorporate features that enhance buyer satisfaction in non-economic
or intangible ways.
4. A fourth approach is to compete on the basis of capabilities—to deliver value to customers
via competitive capabilities that rivals don’t have or can’t afford to match.

Importance of Received Value and Signalling Value

A firm whose differentiation strategy delivers only modest extra value but clearly signals that
extra value may command a higher price than a firm that actually delivers higher value but
signals it poorly.
Keeping the cost of differentiation in line: Company efforts to achieve differentiation usually
increases costs. The trick to profitable differentiation is either to keep the costs of achieving
differentiation below the price premium the differentiating attributes can command in the
market place (thus increasing the profit margin per unit sold) or to offset thinner profit margins
with enough added volume to increase total profits.

When a Differentiation Strategy Works Best

Differentiation strategies tend to work best in market circumstances where:
 There are many ways to differentiate the product or service and many buyers perceive
these differences as having value.
 Buyer needs and uses are diverse—some buyers prefer one combination of features and
other buyers another.
 Few-rival firms are following a similar differentiation approach.
 Technological change and product innovation are fast-paced and competition revolves
around rapidly evolving product features.
Pitfalls of a Differentiation Strategy

To build competitive advantage through differentiation a firm must search out sources of
uniqueness that are time-consuming or burdensome for rivals to match. Other common pitfalls
and mistakes in pursuing differentiation include:

 Trying to differentiate on the basis of something that does not lower a buyer’s cost or
enhance a buyer’s well-being, as perceived by the buyer
 Over differentiating so that price is too high relative to competitors that product quality
or service levels exceed buyers’ needs
 Trying to charge too high a price premium (the bigger the price differential the harder it
is to keep buyers from switching to lower-priced competitors)

 Ignoring the need to signal value and depending only on intrinsic product attributes to
achieve differentiation
 Not understanding or identifying what buyers consider as value.

14.4 Strategic Frameworks for Value Chain Analysis

Value chain analysis requires a strategic framework or focus for organising internal and external
information, for analysing information, and for summarising findings and recommendations.

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