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IAI Actuarial Core Principles · Business Management · Strategy, competitive advantage, strategic decision process and PEST analysis

Which feature is essential for a firm to succeed with a differentiation strategy rather than a cost leadership strategy?

A differentiation strategy succeeds when customers perceive the offering as unique and will pay a premium that exceeds the extra cost of delivering that uniqueness. Low prices, niche targeting or the largest market share are not the defining requirements.

  1. ACustomers must perceive the product as unique and be willing to pay a premium that exceeds the extra cost of providing itCorrect
  2. BThe firm must hold the largest market share in the industry
  3. CThe firm must avoid all spending on marketing and research
  4. DThe firm must serve only a small niche segment
  5. The firm must set prices below the lowest competitor

Explanation

Differentiation works when buyers value the uniqueness enough to pay a premium that more than covers the extra cost of creating it. A niche is characteristic of focus, low prices of cost leadership, and large share is not required.

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