What is a best cost strategy explain how is it unique is this strategy difficult to employ Why or why not?

Some executives are not content to have their firms compete based on offering low prices or unique features. They want it all! Firms that charge relatively low prices and offer substantial differentiation are following a best-costA business-level strategy followed by firms that charge relatively low prices and offers substantial differentiation. strategy (Figure 5.9 "Best-Cost Strategy"). This strategy is difficult to execute in part because creating unique features and communicating to customers why these features are useful generally raises a firm’s costs of doing business. Product development and advertising can both be quite expensive. However, firms that manage to implement an effective best-cost strategy are often very successful.

Target appears to be following a best-cost strategy. The firm charges prices that are relatively low among retailers while at the same time attracting trend-conscious consumers by carrying products from famous designers, such as Michael Graves, Isaac Mizrahi, Fiorucci, Liz Lange, and others. This is a lucrative position for Target, but the position is under attack from all sides. Cost leader Walmart charges lower prices than Target. This makes Walmart a constant threat to steal the thriftiest of Target’s customers. Focus differentiators such as Anthropologie that specialize in trendy clothing and home furnishings can take business from Target in those areas. Deep discounters such as T.J. Maxx and Marshalls offer another viable alternative to shoppers because they offer designer clothes and furnishings at closeout prices. A firm such as Target that uses a best-cost strategy also opens itself up to a wider variety of potentially lethal rivals.

According to government statistics, women are 60 percent less likely than men to become entrepreneurs. Meanwhile, succeeding within the specialty fashion retailing market is notoriously difficult. These trends do not worry Sarah Reeves, a young entrepreneur and 2007 graduate of Auburn University who is rapidly becoming a key player within the Austin, Texas, retail scene by offering high-end fashion at low prices.

On her website (//www.plainiveyjane.com), Sarah describes Plain Ivey Jane as “the go-to place for women who want to elevate their wardrobes. We offer high end designer names at a discount, and the new overstocked apparel is handpicked from over 70 different brands to offer exactly what Austin needs at a price every girl can afford. To pair with your fabulous new wardrobe, Plain Ivey Jane carries accessories from undiscovered local artisans.” We asked Reeves to discuss her firm.

One route toward a best-cost strategy is for a firm to adopt a business model whose fixed costs and overhead are very low relative to the costs that competitors are absorbing (Figure 5.10 "Driving toward a Best-Cost Strategy by Reducing Overhead"). The Internet has helped make this possible for some firms. Amazon, for example, can charge low prices in part because it does not have to endure the expenses that firms such as Walmart and Target do in operating many hundreds of stores. Meanwhile, Amazon offers an unmatched variety of goods. This combination has made Amazon the unquestioned leader in e-commerce.

Another example is Netflix. This firm is able to offer customers a far greater variety of movies and charge lower prices than video rental stores by conducting all its business over the Internet and via mail. Netflix’s best-cost strategy has been so successful that $10,000 invested in the firm’s stock in May 2006 was worth more than $90,000 five years later.

Moving toward a best-cost strategy by dramatically reducing expenses is also possible for firms that cannot rely on the Internet as a sales channel. Owning a restaurant requires significant overhead costs, such as rent and utilities. Some talented chefs are escaping these costs by taking their food to the streets. Food trucks that serve high-end specialty dishes at very economical prices are becoming a popular trend in cities around the country. In Portland, Oregon, a food truck called the Ninja Plate Lunch offers large portions of delectable Hawaiian foods such as pulled pork for around $5. Another Portland food truck is PBJ’s, whose unique and inexpensive sandwiches often center on organic peanut butter. Beyond keeping costs low, the mobility of food trucks offers important advantages over a traditional restaurant. Some food trucks set up outside big-city nightclubs, for example, to sell partygoers a late-night snack before they head home.

Key Takeaway

• A best-cost strategy can be an effective business-level strategy to the extent that a firm offers differentiated goods and services at relatively low prices.

Exercises

1. What is an example of an industry that you think a best-cost strategy could be successful? How would you differentiate a company to achieve success in this industry?
2. What is an example of a firm following a best-cost strategy near your college or university?

Competitive strategy refers to a way of creating competitive advantage over competitors. It represents a greater value for the customer, created either by lower prices or by providing greater benefits and services that justify higher prices.

Generally speaking, there are four possible ways to differentiate a business – to become a cost leader (meaning that you become the lowest-cost producer in the industry) and to become a differentiation leader (meaning that you compete in areas other than price valued by customers), both in a narrow or broad scope of business’ activities.

Choosing the right competitive strategy is crucial strategy development step for the corporate, business unit and products and/or services success.

Cost strategy is built on no-frills. Cost leadership strives towards cutting costs to a minimum possible levels in order to provide customers with lower prices and thus boost their savings. Cost strategy prerequisites normally relate to high technical capabilities and access to capital for the company to invest in technology and assure economies of scale.

In most of the cases cost strategy for first-movers lead to significant increase in market share and capacity utilization, that further drives down costs.

Building a strategy on minimizing costs requires a company to achieve:

• High productivity
• High capacity utilization
• Use of bargaining power to negotiate the lowest prices for production inputs
• Lean production methods (e.g. JIT)
• Effective production process
• Effective distribution channels

Leading cost leadership brands have obtained a major success by introducing revolutionary business models built on a single base – the lowest possible prices for a given perceived value.

Differentiation strategy is built on a belief that one needs a clear and unique positioning. Differentiation leadership focuses in providing perks that add value for consumers, while higher prices are a sort of “make up” for their higher costs.

Building a strategy on a differentiation requires a company to continuously invest in and develop:

• Superior product quality (features, benefits, durability, reliability)
• Branding (strong brand recognition, desire and loyalty)
• Industry-wide distribution across all major channels (i.e. the product or brand is an essential item to be stocked by retailers)
• Marketing capabilities (advertising, sponsorship etc.)

Differentiation strategy could be further divided into:

• Purification (decrease in price; decrease in perceived value) – examples: EasyJet, Tata, Logan etc.
• Hybrid (decrease in price; increase in perceived value) – examples: IKEA (SCM optimisation), Loreal (new brands as a response to crisis) etc.
• Sophistication (increase in price; increase in perceived value) – examples: Mercedes (status), VW (reliability); Toyota (TQM)

Despite the fact that these brands pointed out above achieve significant economies of scale, they do not rely on a cost leadership strategy to compete. Strong marketing capabilities enable them to sell products for a premium and at the same time persuade customers to become brand loyal.

Cost strategy as well as differentiation strategy could be narrow or broad. Small and medium sized companies are often forced to become focused, namely a niche player, since they are unable to compete against better-resourced broad market companies’ offerings. Only true understanding of the market dynamics and customers’ unique needs in combination with unique low cost or well-specified products and/or services eventually result in strong brand loyalty.

How to successfully differentiate your products and/or services in the market? Are your products and/or services uniquely positioned in the market? If not – follow the steps written below:

Step 1: Examine  existing positioning of the company and its products and/or services in customers’ minds

Step 2: Choose the competitive strategy (cost strategy vs. differentiation strategy) you think you should be following

Step 3: Analyze the competition and determine the industry standard

Step 4: Study market dynamics and search for market gaps

Step 5: Choose your most appropriate competitive strategy and look for potential practical solutions

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