Enterprises should pay attention to the following aspects in their understanding of low cost in the cost leadership strategy:
(1) Enterprises can become cost leaders in the industry by strengthening internal cost control and reducing costs to a minimum; they can provide products and services to relatively price-sensitive users at very low unit costs. With their cost advantages, enterprises can gain favorable competitive advantages in the fierce market competition.
(2) The goal of the low-cost strategy is to obtain relatively lower costs than competitors, rather than to obtain absolute low costs.
(3) The cost leadership strategy generally requires the enterprise to become the only cost leader in the entire industry, rather than just one of the many enterprises competing for this position. If this point is not recognized when implementing the strategy, a big mistake will be made in the strategy.
Although enterprises can help build their own competitive advantages and thus improve their competitiveness by implementing the cost leadership strategy, not all enterprises are suitable for adopting this strategy. Different industry natures and enterprise development stages will jointly determine whether an enterprise can use the cost leadership strategy.
Therefore, in order to effectively adopt the cost leadership strategy, enterprises must comprehensively consider the following influencing factors.
(1) Product price elasticity. The so-called product price elasticity refers to the extent to which sales volume changes due to changes in product prices. If the sales volume of a product changes much more than the price, then the product has high price elasticity. To achieve a certain effect in implementing the cost leadership strategy, the products operated by the enterprise should be high price elastic products. In this way, when the enterprise lowers the price, the sales volume of the product will increase significantly, and the increased profit income will exceed the loss caused by the price reduction, so that the total profit of the enterprise will increase further.
(2) Product standardization. If the enterprise produces a wide variety of products and meets the needs of different customers with relatively differentiated products, the enterprise will not be able to carry out large-scale production and it will be difficult to obtain the cost reduction brought by economies of scale. Therefore, for enterprises, standardized products are easier to implement the cost leadership strategy.
(3) Market competition. The cost leadership strategy is more suitable for markets with relatively sufficient competition. In a fully competitive market, customers are more sensitive to product prices and their purchasing behavior is less affected by non-price factors. If the competition in the entire industry is not sufficient but rather monopolistic, then the enterprise will have greater market control power and there is no need to lower prices in many cases. Customers will have a more passive choice of the enterprise’s products.
(4) The enterprise’s own strength. Although the cost leadership strategy can often be achieved through large-scale production, large-scale production and operation requires the enterprise to have certain production facilities, resources and strengths. Moreover, these resources should be unique to the enterprise. It is difficult for other enterprises to obtain the same resources over a period of time, thus reducing the possibility of other enterprises quickly entering the production and operation of similar products.
(5) Customer switching costs. The so-called switching costs refer to the customer’s subjective perception of the costs (including economic and non-economic costs) associated with ending the relationship with the existing enterprise and establishing a new alternative relationship. Among them, the switching costs include two parts: one is the relationship cost that has been invested in the past and will be lost when switching. The other is the potential switching costs involved in establishing a new alternative relationship. If the switching cost of a product is relatively low for customers, then the enterprise is suitable for adopting a cost leadership strategy.
(6) The buyer’s price negotiation power. As market competition continues to intensify, customers will have more and more price options. However, in the current market, there are still some companies, such as those in specialty products and monopoly industries. From the perspective of the company, they can often formulate corresponding products or service products according to their wishes without considering the customer’s acceptance. Therefore, if the buyer’s price negotiation power is relatively high, it is necessary for the company to implement a cost leadership strategy.
(7) Market capacity. When a company sells products at a low price, in order to ensure profit, it must evaluate whether the total market demand can support low-cost operation. If the total market capacity faced by the company is quite limited, the company cannot use a cost leadership strategy, otherwise it will only result in a reduction in profits.