Why adopt a low cost strategy?

Firms adopt a low cost strategy when one or more of these conditions exist:

  • price is the dominant means of competing
  • the operator’s product is a standard, commodity-type item readily available from a variety of other operators
  • there are not many ways to achieve differentiation that have value to customers
  • the product is used, or the service experienced, in almost identical ways by all consumers
  • it is easy for customers to switch from one operator to another
  • buyers are large and have significant bargaining power
  • there are few changes in consumer tastes or technology.

But a note of caution.  If all operators in the market compete on cost, this of itself will not not lead sustainable competitive advantage.  The low cost strategy only leads to long term success if it is relatively rare and/or costly to imitate.   This is why it is often new entrants in to a market that successfully adopt this strategy, because they come in with a business model that the established operators find it very difficult to emulate.  This has been the case in the airline business and in the supermarket business.

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