Low Cost Strategy

1 January 2017

Low cost strategy is one of the three generic marketing strategies. Companies use this strategy to offer low price in its products/services by focusing on various points in its value chain activities. In order to be a successful low-cost competitor in a competitive environment, companies focus on several issues; which all pass from the ways of margin improvement (in terms of increasing revenue and reducing cost) and asset effectiveness (in the sense of minimizing working capital and maximizing winning on asset).

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In other words, we can say that low-cost competitors focus on efficiency in its all activities by redefining and cutting costs in their value chain. Here are different attributes which low-cost strategy focused companies make or follow in order to be competitive and have sustainable low-cost strategies: • Forming partnership in some activities which is too costly for the company to do by itself and/or outsourcing manufacturing activities to low-cost countries.

For example, Huawei Technologies (which is importing and developing PBX telephone products) made partnership with 3Com and Siemens so enter new markets and also by using its some other competitive strengths it outcompetes Cisco (well-known global network manufacturer) within 5-6 years. • Minimizing complex and expensive activities such as, research and development, product design and marketing; and standardizing products and designs. • Having no-extra service but with the best use of asset utilization.

For example, Southwest Airlines lowers its costs by no-frill services but also achieve to maximize its profits by returning the plane from the gate to the air within very short time (about 20 minutes). • Combining low-price with product differentiation. For example, Japanese retailer Muji as a competitor to Wal-Mart and IKEA. It is very important for a low-cost strategy focused company to identify and deal with other low-cost competitors as early as possible before they become strong and successful competitor in market.

Therefore, companies should consider their external environment especially its competitors in order to be able to become more competitive and gain more market share as a low-cost provider. There are 4 ways of analyzing competitive environment: 1) Identifying company’s low-cost rivals: Possible by detecting and responding potential low-cost competitors on time; based on focusing low-cost strategies against to the company. 2) Performing a total cost analysis: Made by identifying a potential threats from companies which are more efficient in their product and service costs. )

Developing all potential scenarios: Company makes what-if scenarios by clear understanding of the market and competitor’s sustainable capabilities in order to prepare better for future. 4) Determining company’s best strategic moves: In this case company uses its what-if scenario understandings in a way to be able to compete and beat its low-cost rivals. While developing company’s strategic moves to gain higher market share and sustainable competitive edge, managers should develop both short-term tactics and long-term strategies.

Short-term tactics allow company to make stronger its strengths and also gain time for the needed analysis to be able to develop long-term strategies while keeping low-cost rivals in a position that does not threats the company. These tactics include offering low-price product/services or providing some other sale incentives, several legal actions such as patent infringement lawsuits, product/service differentiation and lastly focusing more attractive and profitable customers by letting unprofitable ones to rivals.

These short-term tactics also, allow company to maintain market share as well as gain sustainability in its actions. Long-term strategies adjust companies to changing market conditions and also allow them to pursue after new market opportunities. These strategies might be riskier than short-terms’ but bring more profits. Long-term strategy includes offering differentiated products, expanding products/services, entering into new geographical areas, becoming low-cost leader or having low-cost subsidiaries, investing in technology and lastly improving customer services.

As an example, IBM was selling personal computers as a first mover but then it started to sell differentiated product of software by offering service solutions as well when Dell and Gateway started to sell lower priced personal computers. Overall, in order to be able to successfully compete with other low-cost rivals and have sustainability as a low-cost competitor in the market; Firstly, company must analyze its internal and external environment by defining its own and also competitors’ market positions and potential threats to the company.

Secondly, company must be action oriented by using its strengths and competitive advantage to eliminate early detected potential threats for the company in future. Lastly, company must develop a strong plan of action to support its successful competition in the market by entering into the new markets and developing new products on the time and also adapting other necessary tactics as quick as possible.

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