Cost-Based Competition

Definition: 

Competitors whose strategic operational goal is cost-leadership can erode market share and profitability of other businesses. 

Typically global firms (globalisation) have lower costs of production, resulting in lower prices to the end consumer. 

This forces other firms in the industry to change to stay in operation.

Firms that consistently target costs (fixed costs and variable costs) can enter markets at a lower price point to capture market share from rivals. 

These firms force other industry firms to adapt their operational processes (to also reduce costs) or lose revenue, market share and profitability.

Strategies to reduce costs include:

• Achieve economies of scale (get bigger, produce more)

• Buy inputs in bulk from suppliers to reduce COGS (but think about inventory management costs)

• Eliminate waste (reduce defects, wasted time through inefficiencies)

• Standardise products (low variety, high volume)

• Use automation technology to reduce costs

Strategies to counter (fight against) low cost rivals:

• Compete on quality, not price (emphasise positioning / quality)

• Deliver better service (more range, more convenience) than low cost rival 

• Emphasise uniqueness and customisation capacity

• Better employees for better service