When many companies are implementing the cost leadership strategy with great fanfare, hoping that the effective implementation of this strategy will help them regain lost customers and increase their market share as soon as possible, it is also accompanied by operational risks that cannot be ignored. Once the company fails to control and manage these risks, it may lead to the failure of the corporate strategy and cause the company’s operations to face a major crisis or even bankruptcy. How to recognize hidden risks and prevent them from happening is a question that companies must consider when implementing the cost leadership strategy. For companies, the following risks must be taken seriously.
(1) Decline in profits. In theory, if companies lower the prices of their own products, they will increase the amount of customers they buy, thereby increasing the company’s profit level on the basis of compensating for the losses caused by price cuts. However, in actual market operations, due to the increase in many uncertain factors such as the possibility that competitors may also adopt the same strategy and the accelerated changes in consumer demand, the company’s unpredictable variables have increased. The result of price cuts has not brought about a significant increase in sales, resulting in a decline in profits instead of an increase, putting the company’s operations in trouble.
(2) The failure of assets such as equipment due to technological updates. In order to support the operation of the cost leadership strategy, enterprises need to achieve large-scale production, and often invest a large amount of money to purchase tangible assets such as equipment required for production. However, due to the rapid development of technology today, when enterprises put their products into the market or even before they have finished producing them, technological updates and breakthroughs will lead to changes in the entire market demand concept and consumer preferences, making the products produced by the company’s existing equipment rejected by the market. In this way, the company’s existing equipment faces serious depreciation or even being eliminated from the market, causing the company to suffer huge asset loss risks.
(3) It is easy to ignore changes in customer demand. In the process of implementing the cost leadership strategy, enterprises often pay too much attention to how to use various measures to try to reduce the cost of products and pursue selling products to consumers at the lowest price in the same industry. However, with the development of social economy and technological progress, more and more companies are able to provide similar products or substitutes that meet the same functional needs. In addition, with the continuous improvement of people’s income level, consumers’ choice of products has exceeded the original highly sensitive limit of price. When purchasing products, more customers pay more attention to other variables such as product quality, brand, service, fashion, etc. in addition to considering the price factor. Because companies pay too much attention to costs themselves and ignore these changes in consumer demand, their cost competitiveness has declined significantly.
(4) Investment risks increase. One of the important characteristics of the cost leadership strategy is that companies have to invest a lot of money to support the reduction of existing product costs. However, the surrounding environment faced by companies is constantly changing. Therefore, when companies need to transform, they may not be able to successfully reduce costs due to the large amount of funds invested under the cost leadership strategy due to the inability to adapt to the overall environmental changes or the need to adjust their corporate strategies. Therefore, in a dynamic environment, large-scale investment by companies hides huge risks.