Strategic Management – Open Book Test-Question 07

Q7.A firm following the cost leadership strategy outperforms competitors by

manufacturing products or services at a low cost. But cost leadership has many
disadvantages as well. Explain with the help of an example, the disadvantage of the
cost leadership strategy and why the most of the company chasing toward this
strategy?

1. Example chosen for the question – Toshiba is taken as an example for

2. Cost Leadership Strategy-Basics

The cost leadership strategy is an integrated set of actions taken to
produce goods/services with features that are acceptable to customers at
the lowest cost relative to that of the competitors.Firms using cost
leadership strategy commonly sell standardized goods or services(but with
competitive levels of differentiation) to the industry’s most typical
customers.

3. Disadvantages of Cost Leadership Strategy.

 The cost leadership strategy is not risk free.One risk is that the
processes used by the cost leader to produce and distribute its goods
and services could become obsolete because of competitor’s
innovations. These innovations may allow rivals to produce at costs
lower than those of original cost leader , or to provide additional
differentiated features without increasing the product price to
customers.
 A second risk is that too much focus by the cost leader on cost
reductions may occur at the expense of trying to understand customers
perceptions of “competitive levels of differentiation”.
 Imitation is a final risk of the cost leadership strategy.Using their own
core competencies, competitors sometimes learn how to successfully
imitate the cost leadership strategy. When this happens,the cost
leaders must increase the value its good or service provides to
customers. Commonly, its value is increased by selling the current
product at an even lower price or by adding additional differentiated
features that create value for customers while maintaining price.
 This strategy hinges on a company cutting production costs and
producing acceptable products, not exemplary ones. As a result, cost
leadership principles cannot be applied to elite brands. Additionally,
companies whose perceived quality dips from ‘acceptable’ to ‘low’
could jeopardize their customer base.
 With the mass consumer base making purchasing decisions based
almost entirely on the lowest price point, this strategy does not foster
brand loyalty. Should a competitor enter the market with lower prices
and sizable sales momentum, customers could easily be wooed away.
 A cost leadership model requires a large volume of sales for a
business to maintain profitability. Companies must navigate and apply
 operational scaling to achieve sustainability before running out
of capital.
 A cost leadership strategy does not readily allow time for any detailed
market research or product development. Since companies need to
scale quickly, companies that employ this model could be more
susceptible to environmental or market changes due to lack of
company maneuverability and slow reaction time.

Apart from above competitive risks, Other most common errors made by firms in
assessing and acting upon cost position while implementing cost leadership
strategy include:

 Exclusive focus on the cost of manufacturing activities

o An examination of the entire value chain often results in relatively
simple steps that can reduce cost position.
 Ignoring procurement
o Modest changes in purchasing practices could yield major cost benefits
for many firms.
 Overlooking indirect or small activities
o Indirect activities, such as maintenance and regulatory costs often
escape attention altogether.
 False perception of cost drivers
o Firms often misdiagnose their cost drivers.
 Failure to exploit linkages
o Firms rarely recognize all the linkages that affect cost, particularly
linkages with suppliers and linkages among activities such as quality
assurance, inspection, and service.
 Contradictory cost reduction
o Cost drivers sometimes work in opposite directions, and a firm must
recognize the tradeoffs.
 Unwitting cross subsidy
o Firms often engage in unwitting cross subsidy when they fail to
recognize the existence of segments in which cost behave differently.
 Thinking incrementally
o Cost reduction efforts often strive for incremental cost improvements in
the existing value chain, rather that finding ways to reconfigure the
chain.
 Undermining differentiation
o Cost reduction can undermine differentiation if it eliminates a firm's
sources of uniqueness to the buyer.
4. Example explaining main disadvantages

A Japanese company that used to be a tech giant is now struggling to stay

alive. Back in the mid-1980s, Toshiba was one of the world’s most
innovative companies.

During that time they launched the T1100, its first mass-market

laptop. John Rehfeld, a former employee of Toshiba who helped sell the

laptop overseas said: “There were a few laptops out before then but they

all had compromises. That’s why Toshiba got off to a fast start. We had a
laptop that performed like a desktop.”

The Internet killed Toshiba’s growth, people were buying their competitors

computers for lower prices online. In 2016 Toshiba announced that they

would stop making PCs for European consumers, but will continue to sell

computers to businesses in Europe and the US. In 2017 Toshiba

announced that they are considering selling its prized memory chip

business to pay down debt. Later that year the world’s second-largest

producer of NAND memory chips Bain-Led Group stated that they bought
the chip business for $18 billion.

It took Toshiba 70 years to reach its peak and just a decade to fall into an
abyss.”

Another example you shall refer to is Mosar baer Handling Price way
which is mentioned in Manikutty book page No 97.

5. Reason for why most of the companies chasing towards this

strategy.

The cost leadership strategy is utilized by some of the world’s largest

companies and should be carefully understood by any business with a
product — whether it plans to implement the method or not.
 A cost leadership strategy targets a specific, large customer majority within
major demographics and markets. Purchasing decisions made by this
customer majority are based on the product’s price point rather than
brand loyalty.

Companies employing a cost leadership strategy concentrate on winning

market shares by offering acceptable-quality products at lower prices than
their competition. This is accomplished by optimizing a few key
components of their business.

1. Maintaining the lowest price point often means accepting thin profit
margins. Companies must scale their sales volumes to where even
a slim margin, repeated over a large number of sales, can
maintain profitability.
2. To protect as much profit as possible, these companies must stress
efficiency in every part of their operation. Cost leadership
companies aggressively improve upon their processes, leverage
long-term relations with vendors to reduce costs over time, and
quickly scale their operations, taking advantage of bulk and
wholesale pricing.
3. Process Innovations,which are newly designed production and
distribution methods and techniques that allow the firm to operate
more efficiently,are critical to the successful use of the cost
leadership strategy.

Example-Walmart

 Walmart epitomizes the cost leadership model, offering thousands of

products at the lowest prices. This vast, international organization serves
more than 100 million customers every week. Walmart built a brand
dynasty with the potential to effectively outcompete its rivals for years.

6. Related Links

.(In manikutty book-Page No 89)

https://valuer.ai/blog/50-examples-of-corporations-that-failed-to-innovate-
and-missed-their-chance/

https://mbaonline.pepperdine.edu/blog/pros-cons-cost-leadership-
strategies/