BEST COST STRATEGY
Objectives and Goals
At the end of this module you will be able to:
1) Recognise the value of approaches used to fulfill your customers expectations.
2) Extend your customer lifecycle.
3) Strengthen your market position.
Introduction
As a concept, Best-Cost means high quality and low price of a product. This term is used to indicate a situation where the company tries to achieve the best (lowest) cost relative to the competitors who offer similar products and simultaneously tries to improve quality.
The best-cost strategy is the strategy of increasing the quality of products while reducing costs. This strategy is applied to give customers “more value for the money.”
Outline
It is achieved by satisfying customers’ expectations on key attributes of products. At the same time, prices are charged lower than the competitors.
By following the best-cost strategy, the company attempts to attract the ‘value-conscious buyers’ (those buyers who want a superior product at a lower price).
This strategy is a hybrid. It balances a strategic emphasis on low-cost against a strategic emphasis on differentiation which is understandable.
It is considered as the most powerful competitive strategy of all. It presupposes ‘relentlessly striving to become a lower-and-lower cost provider of a higher-and-higher caliber product.’ Toyota Company of Japan followed the best-cost strategy for its Lexus cars to beat Mercedes-Benz and BMW cars.
Example of best cost strategy
Microsoft is widely recognized as the committed user of the best-cost strategy in software. This world-famous IT-giant is continually improving the quality of its software and at the same time continually reducing the costs of its software products.
DIFFERENTIATION STRATEGY
Introduction
A differentiated product is unique by itself.
A product can be differentiated based on its form, shape, quality, durability, reliability, reparability, style, design, or some other features of the product.
Performance quality (low, average, high, or superior quality in terms of using the product for a particular purpose) can be used as the basis of product differentiation.
A company may set its products at a high-quality range and gradually switch down to average or low quality or switch up to superior quality.
Outline
The goal of a differentiation strategy is to achieve a competitive advantage by offering a unique product to customers. When a product becomes unique due to differentiation, it becomes attractive to customers.
However, the differences made in the product must be of value to customers.
A product with differentiated features can command premium prices (prices above the industry average).
Customers are usually to pay premium prices because they value the differentiated features of the product. Thus, the company that adopts a differentiation strategy can increase profits by charging higher prices and can’ outperform its competitors.
Types of Differentiation Strategy
Broad Differentiation Strategy, and Focused Differentiation Strategy.
A “broad differentiation strategy” is adopted by a company to be “unique to a wide range of customers”.
For example, a cement company is offering its product to a broad market with the brand name.
On the other hand, a differentiation strategy is called a focused differentiation study when the company divides its market into several small segments (niche) and then offers a product design for each market second segment.
For example, follows of focused differentiation strategy in that it offers normally bolted cola, canned cola, and diet-cola for differentiation of different segments.
7 Ways to Differentiate Your Business from the Competition
• Differences in quality.
• Innovation.
• Responsiveness to customers.
• Responding to customers’ psychological desires.
• Wide choice of customers.
• Reliability of products.
• Availability of spare parts/peripherals/accessories.
Ways for differentiation
• Buyers’ perception
• Diversity in needs
• Different approaches to differentiation by different competitors
• Technological change
• Competition around evolving features
Reasons for Failure of Differentiation Strategy
The common reasons for failure in differentiation strategy include:
• Attributes with little value
• Easy to copy
• Inability to benefit buyers
• Over-differentiation
• Failure to understand buyers
• Buyers’ satisfaction with basic product
FOCUS STRATEGY
Introduction
Focus strategy concerns itself with the identification of a niche-market and launching a unique product or service in that market. A niche-market is a narrow segment of a total market.
A focus strategy involves offering the niche-customers a product customized to their tastes and requirements. It is directed towards serving the needs of a limited customer group.
A company can pursue a focus strategy either with a low-cost approach or a differentiation approach.
Focused Low-Cost Strategy
The focused low-cost strategy of entering into a niche market at a low cost with a unique type of product that has a special need among the customers in the niche market.
This strategy is targeted to those via so desire to have unique products at a low cost. The company that follows this strategy competes against the cost leader in the niche market where it has a cost advantage.
With this strategy accompany concentrates on small volume custom-built products for which it has a cost advantage.
The company may adopt this strategy to serve a buyer segment whose needs can be satisfied with less cost compared to the rest of the market.
Focused Differentiation Strategy
‘Focused Differentiation Strategy’ is the strategy of operating a business with a differentiated product in a chosen niche market. When a company pursues a focused strategy based on differentiation, it concentrates on a harrow buyer-segment and offers customized attributes in products better than competitors’ products.
Here, the focuser company competes against competitors not based on low-cost, rather based on product differentiation. Since the focuser company knows the needs of niche customer-groups, it can successfully differentiate its products.
Requirements for Effective Implementation of Focus Strategy
A company requires unique skills, capabilities, and resources for the successful implementation of focus strategy. Some of these are:
• Managers’ ability to explore a well-defined but, narrow market segment.
• Clear identification of competitors who serve a market broader than the niche market but are unable or disinterested to serve the niche for some reason.
• Firm’s ability to provide adequate-capital.
• Designing and maintaining a low-cost distribution system, with strong cooperation from the channel members.
• Strong marketing ability and creative flair.
LOW-COST STRATEGY
Introduction
A company strategy of selling its products at a price lower than its competitors is known as a cost leadership strategy. The emphasis is placed on the production of standardized products at a low per-unit cost for price-sensitive customers.
Charging lower price becomes possible when the company can ensure post-reduction by operating business in a highly cost-effective manner.
The company emphasizes cost reduction without reducing quality. The company intense to gain market share by underpricing the competitors.
Market Situations Favorable for Cost Leadership Strategy
When the brand differences from company to company are minor, and at the same time, the products are standardized and readily available
• When the market is composed of a large number of price-sensitive buyers.
• When there are few ways to achieve product differentiation.
• When switching costs from the company’s brand to competitors’ brands are low.
• When there are a large number of buyers with significant bargaining power, i.e., they, have significant power to negotiate price-related terms and conditions.
• When price-competition among, the sellers/suppliers is very tough.
• When the company is in a position to use the lower-cost edge to attract price-sensitive buyers in great enough numbers to influence total profits.
Reasons for Failure of Cost Leadership Strategy
• It may invite aggressive price-cutting by competitors. It may lead to a price-war that may lead to lower profitability.
• Cost advantages may not sustain if competitors can easily imitate the strategy.
• If a low-cost product does not contain enough attributes to be attractive to prospective buyers, the strategy may fail. Low price is not always appealing to buyers. Attractiveness may be lost if the product is features-poor or quality-deficient.
• The cost leadership strategy may become ineffective when there are technological breakthroughs by the competitors in the industry.
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