Low Cost Leadership Strategy
Under Strategic Management, business level strategy is very important. Here low cost leadership strategy is essential for understanding to all beneficiaries. However, there are discussed about the low cost leadership strategy, its benefits, favorable situations and failure reasons.
Low Cost Leadership Strategy:
Low cost leadership strategy is also known as Low Cost Provide Strategy or Cost Leadership Strategy or Low Cost Strategy. The company that follows this strategy intends to become the overall low cost provider in the industry in which the company operates its business. A company’s strategy of selling its products at a price lower than its competitors is known as low cost leadership strategy.
Benefits of Low Cost Leadership Strategy:
There are described about the benefits of low cost leadership strategy. Such as:-
Overcoming threats from competitors:
Because of its cost advantage, a company can protect itself from the business-attacks of the competitors. If participants enter into marketplace with cheap, the firm can even further expurgated its bills. This is possible because the company has already developed ways to reduce cost and sustain the cost advantage. Its cost leadership position helps it dominate the competitors.
Effective dealing with powerful suppliers:
When suppliers are few in number as well as powerful, they may try to increase prices of raw materials or other inputs. The company with a low cost strategy can endure such price-increase because of its overall lower cost.
Facing powerful buyers effectively:
Powerful big buyers (such as dealers and wholesalers or retail chains like Agora, Meena Bazaar or Wal-Mart) may dictate prices of a company’s products.
Encountering threats from substitute products:
A low cost leader is able to overcome threats from substitute products. It can reduce the price of its products if substitute products start entering into the market. Low cost leadership helps the company retain its market share.
Overcoming threats from the entry of potential competitors:
A company with a low cost strategy can discourage other potential investors to come to the market. Its cost advantage automatically creates barriers to entry. Other companies may find it difficult to match their costs with that of the low cost leader.
Favorable Situation for Low Cost Leadership Strategy:
A low cost provider strategy works best under the following situations:-
- When the brand differences from company to company are minor and at the same time, the products are standardized and readily available.
- When the market is composed of a large number of price sensitive buyers who want to buy products at the lowest possible price.
- When there are few ways to achieve product differentiation. It means that it is difficult to differentiate the company’s products from those of competitors due to the nature of the product. Buyers become sensitive to price differences when product-to-product differences are negligible. In such a situation, they will go for the lowest price.
- When switching cost from the company’s brand to competitors brands are low or even zero. If buyers purchase another brand and this switching from the previous brand does not involve any additional cost (such as transportation or repair) they are likely to opt for the lower-priced brand.
- When there are a large number of buyers with significant bargaining power. Example they have significant power to negotiate price-related terms and conditions.
- When price competition among the sellers or suppliers is very tough. Low cost strategy helps producers to compete effectively based on the price.
Failure of Low Cost Leadership Strategy:
Low cost strategy has some shortcomings or pitfalls. Managers need to be careful of these drawbacks so that they can assume suitable actions to be fruitful with this plan. The inadequacies are as follows, which are accountable for the disappointment of the low cost leadership strategy:-
- It may invite aggressive price-cutting by competitors. It may lead to price-war that may lead to lower profitability.
- Cost advantages may not sustain if competitors can easily imitate the strategy. When the competitors are able to copy the cost advantages, low cost strategy will fail.
- The low cost strategy may become ineffective when there are technological breakthroughs by the competitors in the industry.
Strategic Choice of Low Cost Leadership Strategy:
In order to be successful with the low cost strategy, the low cost providers resort to various strategic choices:
- They choose a low level of product differentiation keep differentiation efforts. Its aim is not to be leader in differentiation, rather it waits and sees when customers seriously want to have differentiated features in the product.
- They mainly target the average customer, and thus they do not operate in different market segments with different types of products. This is because it is highly expensive to develop product lines for different market segments.
- They develop distinctive competencies in manufacturing and materials management to reduce manufacturing cost and thereby increasing efficiency.
- They develop skills in flexible manufacturing or lean manufacturing, Just-In-Time (JIT) production and total quality management. They also adopt efficient materials management techniques.
- They emphasize strict production control and rigorously use budgets to continuous production process.