Page 191 - DMGT550_RETAIL_MANAGEMENT

Retail Management

Notes A firm contemplating this strategy must not dramatically sacrifice the quality of the product in
an attempt to reduce their production costs. If your product or service lacks the quality demanded
by the consumer, it probably won’t sell well. If the product is not appealing to the customer,
chances are they will seek your competitors. Ways to reduce costs might include:
1. purchase more efficient production equipment
2. purchase other fixed or capital assets to increase efficiency
3. eliminate one or many cost producing activities

4. find less expensive suppliers of raw material/product
5. reduce overtime costs
6. reduce waste of products or raw materials
7. implement and continuing monitor cost cutting measures
Passing your savings onto the consumer, which is one of the options a low cost producer can
provide, is usually the most vulnerable strategy a business can employ. It is so easy to match or
attack - a new business may spring up tomorrow that has the ability to produce the product or
service at even lower costs. Be aware of this when deciding on your competitive strategy.
One final note on the low cost producer strategy. Lets assume for a moment that you are
planning to establish a small business, selling home stereos. You decide to underprice all
competitors. The first question is “would you use the low cost producer strategy”? The answer
is NO - there is no way you could be a low cost producer with the likes of Wal-Mart and K-Mart
hanging around. These companies purchase their products in large quantities and receive volume
discounts. Therefore, your business probably would not have a cost advantage over these entities.
You would have to compete in other ways, such as service, quality, convenience, brand names,
and so on. The second question is “can you undercut all other competitors. The answer is YES
and if you wanted to, you could give the stereos away for free. Chances are, however, the
operation would NOT be open for long.

11.2.2 Differentiation Strategy

The differentiation strategy is used when consumer needs, wants, interests and/or desires are so
assorted that a standardized product does not satisfy their appetite. In other words, the
differentiation strategy is based on learning what features and attributes are important to the
majority of consumers and then incorporating or adding those features and attributes to their
product. Such additions make the product or service more important, desirable and valuable to
the consumer. The company using a differentiation strategy generally gains a competitive
advantage over existing operators within the industry.

Since consumers place more value on differentiated products and services, they are willing
to pay a premium or higher price. This last statement brings up two important issues:
First: the cost to offer the differentiated feature or attribute must not outweigh the price
consumers are willing to pay for the feature and attribute. Second: the higher price charged
by the firm for the differentiated feature must not exceed the amount consumers are
willing to pay for the “additions” or new feature. Therefore, careful research is required
for both considerations.
Let us assume a pizza parlor delivers pizza to its customers with no guarantee of arrival time.
Another might promise a 30 minute delivery guarantee within a specific area or the pizza is free.
The pizza parlor with the 30 minute delivery promise has differentiated the method of providing
service. If consumers value this differentiated feature, then the pizza shop will likely enjoy
increased market share, be able to charge a higher price, and/or attract and maintain loyal
customers.

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