Video Transcript: Low-Cost Strategy

Striving to be the industry's overall low cost provider is a powerful competitive  approach in markets with many price sensitive buyers, a company achieves low  cost leadership when it becomes the industry's lowest cost provider, rather than  just being one of perhaps several competitors with low costs, successful low  cost providers boast meaningful lower costs than rivals, but not necessarily the  absolute lowest possible cost. In striving for a cost advantage over rivals,  managers must include features and services that buyers consider essential a  product offering that is too frills free can be viewed by customers as offering little value regardless of its pricing, a low cost leader's basis for competitive  advantage is lower overall costs than competitors. Success in achieving a low  cost edge over rivals comes from eliminating and/or curbing non essential  activities and/or out managing rivals in performing essential activities. A  company has two options for translating a low cost advantage over rivals into  attractive profit performance. Option one is to use the lower cost edge to under  price competitors and attract price sensitive buyers in great enough numbers to  increase total profits. Option two is to maintain the present price be consistent  with the present market share, and use lower cost edge to earn a higher profit  margin on each unit sold, thereby raising the firm's total profits and overall return on investment to achieve a low cost edge over rivals, a firm's cumulative costs  across the overall value chain must be lower than competitors cumulative costs.  There are two major avenues for accomplishing this. First, performing essential  value chain activities more cost effectively than rivals. And second, revamping  the firm's overall value chain to eliminate or bypass some cost producing  activities. A competitive strategy predicated on low cost leadership is particularly powerful when price competition among rival sellers is especially vigorous. The  products of rival sellers are essentially identical and are readily available from  sellers. There are few ways to achieve product differentiation that have value to  buyers. And finally, buyers incur low costs in switching their purchases from one  seller to another. Perhaps the biggest pitfall of a low cost provider strategy is  getting carried away with overly aggressive price cutting and ending up with  lower rather than higher profitability. A second big pitfall is relying on an  approach to reduce costs that can be easily copied by rivals. A third and final  pitfall is becoming too fixated on cost reduction. A low cost provider strategy  means striving to achieve overall lower costs than rivals and appealing to a  broad spectrum of customers, usually by underpricing rivals