Question

Why would firms adopt a cost leadership strategy? What are the risks with this strategy? 300 words

Answer 1

The cost leadership strategy, one of the significant corporate strategy, introduced by Michael Porter and popularized by the Boston Consulting Group (BCG), aims directing business efforts towards reducing the cost of business operations and emerge as the lowest lowest-cost business in its industry. To implement this strategy successfully, the business should focus on efficient production facilities, keeping overhead expenses under tight control, and to reduce the number of marginally profitable customer accounts. The following are the reasons which influence the business to make application of cost leadership strategy:

• The cost leadership strategy assists businesses to gain high profit margins. If products and services are sold at competitive prices using the lower cost basis, then it allows to the business to gain higher profit margins compared to the one which invests higher to produce the similar products and services.
• Other reasons of using cost leadership strategy is to increase customer base and market share. The competitive price determined on the basis of lower cost basis ill attract more customers as customers always look for better deals in the market.
• The lower cost businesses have better chance of survival during the tough economic times like recession, downturn, price-war, etc.

However, there are several risks associated with this strategy. They are discussed as follows:

• The benefits of cost leadership strategy may be reduced or erased, if technology innovations are introduced by competitors.
• The business may fail to focus on environmental changes and changes in customer preferences, while just paying attention on improving process efficiency to reduce costs.
• Competitors may imitate the same strategy along with providing additional value in other areas to attract more customers.

In this way it is hard to hold the leading position on the basis of this strategy for long.