Question

strategic management

Discuss how a cost leadership strategy can allow a firm to earn above-average returns in spite of strong competitive forces. Address each of the five competitive forces.

Answer 1

Rivalry: Having the low cost position serves as a valuable defense against rivals. Because of the cost leader’s advantageous position, especially in logistics, rivals cannot reduce their costs lower than the cost leaders’, and so they cannot earn above-average returns. 2) Buyers: The cost leadership strategy also protects against the power of customers. Powerful customers can drive prices lower, but they are not likely to be driven below that of the next-most-efficient industry competitor. Prices below this would cause the next-most-efficient competitor to leave the market, leaving the cost leader in a stronger position relative to the buyer. 3) Suppliers: The cost leadership strategy also allows a firm to better absorb any cost increases forced on it by powerful suppliers, because the cost leader has greater margins than its competitors. In fact, a cost leader may be able to force its suppliers to keep prices low for them. 4) Entrants: The cost leadership strategy also discourages new entrants because the new entrant must be willing to accept no better than average returns until they gain the experience and core competencies required to approach the efficiency ofthe cost leader. 5) Substitutes: For substitutes to be used, they must not only perform asimilar function but also be cheaper than the cost leader’s product. When faced with substitute products, the cost leader can reduce its price.