A company attains a competitive advantage when it outperforms industry rivals in pleasing customer’s needs and preferences. Companies should select an overall strategic approach when developing its competitive advantage. There are numerous variations of strategies stemming from five generic approaches. A low cost provider strategy is one of the five generic competitive approaches developed by Michael Porter. A low cost provider strategy means appealing to a broad cross section of the market by providing goods or services at the lowest price.
The Idea in a Nutshell
The main idea behind a low cost provider’s competitive advantage is lower overall cost in an effort to bring the cost savings to the customer. The strategy of being a low cost provider is to under price rivals within the industry to capture a significant amount of market share. Achieving low overall cost strategy is usually obtained through: improving process operations, tight control of overhead costs, vertical integration, reducing input costs, and capitalizing on economies of scale. There are countless ways in which an organization can reduce costs and new techniques are always evolving.
The Top Ten Things You Need to Know About a Low Cost Provider Strategy
1. Flourishing low cost providers are extraordinary at discovering methods to reduce costs associated with the organization. As a low cost provider your primary goal is to discover as many ways to reduce cost within your organization without sacrificing effectiveness.
2. In today’s economic environment becoming a low cost provider is a powerful competitive approach due to the high number of price sensitive buyers. There will always be price sensitive buyers but in an economic downturn more people will look for a bargain product rather a product with frills.
3. Your cost advantage must be difficult for rival companies to imitate in order to be extremely effective. Once your cost advantage is able to be duplicated you no longer maintain a cost advantage.
4. Low cost providers usually gain purchasing power over suppliers due to their high quantities of output. As a low cost provider you will more than likely be producing in large quantities due to economies of scale. This will allow for bulk purchases from suppliers increasing the organizations purchasing power.
5. Resourcefulness must be expected from all organization personnel to formulate creative and effective ways to keep cost down. As technology continues to improve, creativity is a key to maintaining or creating an edge over industry rivals.
6. Evaluation of all cost producing processes is necessary. By evaluating cost creating activities managers are able to determine which activities need to be revamped or removed from business operations.
7. Small administrative staffs should be kept in an effort to reduce overhead costs. Low cost provider should look for cost savings in every department of the organization.
8. Benchmarking is imperative in order to track industry rival’s costs. In order to be the low cost provider in your industry you must know what cost’s your rival are incurring.
9. A low cost leader can make price cuts as a means of keeping new entrants from entering the market. An overall low cost provider can keep out new competition by lowering prices enough to make the market unattractive for prospective entrants.
10. Persistently cutting prices could result in lower profits and may not contribute to enough buyer interest. The lowest price is not always adequate; the product must contain enough attributes to persuade customers to purchase the given product or service.
The Video Lounge
The video shows how a low cost provider strategy can go awry when a company cuts too many product or service attributes in an effort to reduce cost. The airline has sacrificed service in order to reduce cost and has produced a negative reputation for itself.
There are many price conscious buyers in the market, making a low cost provider strategy a very viable one in today’s economic situation. There will always be consumers who will shop for the lowest priced items. The biggest challenges with a low cost strategy is staying on top of fierce competition and creating innovative ideas to reduce costs, as well as not sacrificing too many product attributes in an effort to reduce costs.
Malburg, C. (2000). COMPETING ON COSTS. Industry Week/IW, 249(17), 31. Retrieved from Business Source Complete database.
Thompson Jr., A. A., Strickland III, A.J., & Gamble, J.E. (2010). Crafting and executing strategy: The quest for competitive advantage. New York, NY. McGraw Hill/Irwin.
Contact Info: To contact the author of “Top Ten Management on Overall Low Cost Provider,” please email Andrew J. Massey at email@example.com.
David C. Wyld (firstname.lastname@example.org) is the Robert Maurin Professor of Management at Southeastern Louisiana University in Hammond, Louisiana. He is a management consultant, researcher/writer, and executive educator. His blog, Wyld About Business, can be viewed at https://wyld-business.blogspot.com/. He also serves as the Director of the Reverse Auction Research Center (https://reverseauctionresearch.blogspot.com/), a hub of research and news in the expanding world of competitive bidding. Dr. Wyld also maintains compilations of works he has helped his students to turn into editorially-reviewed publications at the following sites:
- Management Concepts (https://toptenmanagement.blogspot.com/)
- Book Reviews (https://wyld-about-books.blogspot.com/) and
- Travel and International Foods (https://wyld-about-food.blogspot.com/).