Generic Business Strategies
The impetus for striving to be the industry’s low-cost producer can drive from sizable economies of scale, strong learning and experience curve effects, other cost-cutting and efficiency-enhancing opportunities, and a market comprised of many price-conscious buyers.
Trying to be the industry leader in achieving an overall low-cost position typically entails being out in front of rivals in constructing the most efficient-sized plants, in implementing cost-reducing technological advances, in getting the sales and market share needed to capitalize on learning and experience curve effects, in maintaining a tight rein on overhead and other administrative types of fixed costs, and in containing costs in such areas as R&D, advertising, service, and distribution.
This strategy is powerful when:
•demand is price elastic;
•all firms in the industry produce essentially the standardized products;
•there are not many ways of achieving product differentiation that have much value to buyers;
•most buyers utilize product in the same way;
•buyer incur few (if any) switching costs in changing from one seller to another and thus are strongly inclined to shop for the best price.
Advantages in pursuing this strategy:
•as concerns competitors, the low-cost company is in the best position to compete offensively on the basis of price;
•as concerns customers, the low-cost company has partial profit margin protection from powerful customers since the latter will rarely be able to bargain prices down past the survival level of the next most efficient firm;
•as concerns suppliers, the low-cost producer can, in some cases, be more insulated than competitors from powerful suppliers if its greater efficiency allows more pricing rooms to cope with increases in the costs of purchased materials;
•as concerns potential entrants, the low-cost producer is in a favorable competitive position because having the lowest costs not only acts as a barrier for a new entrant to hurdle but it also provides the leeway to use price-cutting as a defense against market inroads made by a new competitor;
•as concerns substitutes, the low-cost producer is, compared to its rivals, in a favorable position to use price cuts to defend against competition from attractively priced substitutes.
Risks and disadvantages:
•technological changes can result in cost or process breakthroughs that nullify past investments and efficiency gains;
•rival firms may find it comparatively easy and/or inexpensive to imitate the leader’s low-cost methods;
•heavy investments in cost minimization can lock a firm into both its present technology and present strategy, leaving it vulnerable to new state-of-the-art technologies and to a widening of customer interest in something other than a cheaper price.
Strategic success in trying to be low-cost producer usually requires a firm to be the overall cost leader, not just one of the several firms vying for this position. When there is more than one aspiring low-cost producer, rivalry among them is typically fierce.
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