Illustrates the pitfalls of a low-cost provider strategy

Question

Illustrates the pitfalls of a low-cost provider strategy?

Answer 1

The pitfalls of a low-cost provider strategy are as follows:

a. Perhaps the major drawback of a low-cost provider strategy is receiving carried left with overly aggressive price cutting and ending- up with lower, rather than superior, profitability.

b. Low-cost or low-price benefit outcomes in superior profitability only if (i) prices are cut by less than the amount of the cost benefit or (ii) the added value gains in unit sales are big enough to bring in superior total benefits despite lower margins per unit sold.

c. A second big drawback is not emphasizing avenues of cost benefits that can be kept proprietary or that demote rivals to playing catch-up.

d. A third drawback is becoming too fixated on cost reduction.

e. Even if these errors are avoided, a low-cost competitive approach still carries risk.