Question Deepika Business & Management

In any market structure, an appropriate once-off expenditure on product differentiation will guarantee the firm’s ability to maximize economic profit into the future. Discuss.

In any market structure, an appropriate once-off expenditure on product differentiation will guarantee the firm’s ability to maximize economic profit into the future. Discuss.

Did you know that we write custom assignments? We have experts in each specific subject area with vast experience. Get a complete answer and find out more about our writing services.

Answer Internal Staff

In short, no one off action, including differentiation, can guarantee a firm’s success, or that it will achieve maximum profits.

This is because differentiation is only one factor that plays a role in firm success, and as markets change over time any advantage offered by differentiation will surely be eroded.

A crucial point is that differentiation may not result in an advantage, simply being different from competitors does not guarantee sales. A product must satisfy the needs of consumers if it is to be successful in the market, without this no amount of differentiation will be beneficial.

Similarly, even a good product with differentiation may not be successful if it is not marketed correctly, for example if it gains no awareness among consumers. Thus companies need to ensure a full marketing plan is created for products which ensures that they have strengths throughout the marketing mix (4Ps/7Ps).

Profitability of a firm is determined by more than just differentiation, or even marketing as a whole. A firm with good marketing and products can still make a loss if costs are not suitably controlled. Economic profit is a specific type of profit which takes into account opportunity cost, which is a consideration for the alternatives that could be undertaken.

The economic profit of a firm thus must look at the returns that are made through its activities in comparison to alternatives – for example selling a different product, or moving to a different industry. Differentiation of a product offers no guarantees on profitability or economic profit. Even if success is gained in that particular market, it may be the case that it is a market with low returns in general and the firm would be better off employing its capital in a different industry.