Question

Low Cost Leader Strategy What are some of the risks associated with a low cost leadership strategy? Provide one original example of a company that you believe employs this strategy and why?

Answer 1

A low cost leadership is established by having lowest possible costs among all competitors in a particular sector. This provides an inherent cost advantage and a lead over competitors.

Risks-One of the risks of a low cost leadership is that if the low cost model can be replicated then competitors may be able to copy it and reduce the company's advantage. As technological improvements happen, it can pose significant challenge to the cost leadership advantage. Another risk is that few competitors may focus on a niche market segment and may achieve even lower costs in that, thereby, taking up most of the market share in that segment. Companies can also face challenges in product differentiation as focus will be on efficiency in processes and products. Additionally, a very low price point may raise question marks about product quality in customers.

Wal-Mart is a very good example of a company which has used cost leadership to become a leader in retail.It buys in bulk and sells products at extremely competitive prices, thus, achieving profits by selling larger volumes on low margin.