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MGT451_VideoTranscript_Mod04_P2 Business-Level Strategy- Low-Cost Provider Strategy

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All right guys the first of the five generic strategies or business level strategies that Michael Porter proposed was a low cost provider strategy. This as you see here: a low-cost provider's basis for competitive advantage is lower overall costs than a competitor's. Again, not necessarily the lowest price, but the lower overall cost of producing the good or delivering the service. Successful low-cost leaders who do have the lowest industry costs are usually exceptionally good at finding ways to drive costs out of their business and still provide a product or service that buyers find acceptable. Now this last point is really important a lot of times people think of low cost provider and they automatically think that its just about offering the lowest-cost, the lowest prices irrespective or how good or bad the actual service or good is. That is definitely not the case, and a good example that we have here are the two companies: the Geely vs. Kia. Now these are two automotive manufactures, two car makers, and they both can definitely be seen to be pursuing a low-cost product strategy. However, as you can see from the two pictures of these vehicles on your screen in front of you now, they are very different products despite pursuing the same strategy in being basically the same thing that is a car. The top picture there is a Geely. It is a Chinese manufactured car and from all - no matter which way you look at it - it is terrible. It is very cheap, but it is cheap for a reason it is a shocking [sic] car. The picture the vehicle below depicts a Kia; a relatively new Kia. And that is also a relatively cheap car certainly compared to many of its rivals. It is offered at a lower price because they are able to reduce their cost, Kia, of manufacturing that car. But you only have to look at that picture, especially compared to the one above it, to see that it is an infinitely better looking car and is, I can also tell you, is a much better product overall, it's received very good reviews and is generally acknowledged as a very good product. So and, as a result, Kia has been quite successful certainly over the last few years and their sales have grown exponentially because they're not only cheap and, certainly their formal price is cheap, and they're able to do that because they do lower their costs but they offer a product that is still quite acceptable - still certainly based on that picture it is a good looking car - so it's still acceptable in terms that the value that it is proposing, unlike the Geely. Not surprisingly they don't sell many of those because it might be cheap but it's not good enough in, as a car, for people to actually want to go and buy it. All right so in terms of the competitive advantages and risks associated with the low-cost provider strategy, first of all there are often greater total profits and increased market share that can be gained from under-pricing competitors. It's a very easy way to do it if you are able to just reduce your price, because of your lower costs that can often lead to greater profits and increased market share in particular. There are also larger profit margins when selling products at prices comparative to, and competitive with, your rivals. On the other hand, low pricing does not attract necessarily enough new buyers; it's often hard to get people new to your company you only offering lower-cost. Again, you need something more than that to attract them. And, the other issue, or risk I should say, is that rivals retaliatory price cutting may set off a price war and so we talked about how it's easy if you're able to offer a lower price, to be able to get those larger profits and increased market share. If it's easy for you then it's likely easy for your competitors to do the same. And what we often find is companies will often drop their price, initially, even for a short period of time to try and get that initial movement and sales for that particular company. So that can set up a price war and that's not something that you want to be involved in as a firm. All right, so if you are, if you decided 'yes we would like to pursue a low-cost strategy' what are the sorts of things that you can put in place to help achieve that? First of all, striving to capture all available economies of scale - being able to produce things in large quantities, in a relatively standardized way is a very good way of minimizing your cost. Other things, like taking full advantage of experience and learning curve effects. Try to operate facilities at full capacity obviously. And looking back at you supply chain efficiency - we talked about that in previous weeks in terms the internal environment, as well as the obvious things like using lower input costs, so using your supplies, and so on, that are lower-cost than your competitors perhaps. So there are many, many ways like, I'm not going to read this all here, you can read it yourself, of these cost-cutting, rather, methods that we can put in place to help achieve our competitive advantage, or through this strategy; and I've also included on the website, the Moodle site, a nice little video there showing how Aldi, who are a very good example of a company, who's been very successful by employing a low-cost provider strategy. All right, there are certain conditions in which a low-cost strategy will work best; so certain situations and scenarios when it might be better to pursue this strategy than others. First of all if price competition among rival sellers is vigorous; so if the price your product is a key determining factor as to whether people will, or will not, buy your product obviously then it is advantageous and if it's going to be of use to you guys as a company if you can offer it at a lower price through lowering costs. When identical products are available from many sellers obviously if they're all the same but you happen to be that little bit cheaper than that will give you an advantage. If there are many ways, or few ways, rather, to differentiate industry products when most buyers use the product in the same way, when buyers incur low costs in switching among sellers - that's a big one. If it's quite difficult from one brand to another then there likely to stay with that brand obviously. If it's easy then their more likely to just go to which ever is cheapest. How many times do you go into the supermarket, the supermarket, you look at a product - something like toilet paper - and often people will look at it and say 'well I'm just going to get the cheapest, toilet paper is toilet paper'. It's pretty standard as a product, I'm just going to go with whichever is cheapest. When the majority of industry sales are made to a few, large volume buyers, or, when new entrants can use introductory low prices, which I talked about before, to attract buyers and build a customer base - these are all conditions in which a low-cost strategy is most advantageous. Finally, what are some issues? We've talked about some of the good things that are associated with this particular strategy, but there are some dangers you need to be aware of as well. Firstly, engaging in overly aggressive price-cutting does not necessarily result in unit gains sales large enough to recoup forgone profits. So what you need to think about that is if you are trying to lower your costs so that you can then pass that on in the lower final price of your product, if you cut that so fine, what we often find is that even if you increase your sales because you've reduced your price, if you reduce it too much that it affects your overall sales, profits, or margins then that's not going to be a particularly successful strategy for you. You're not to make more money if you're losing money or if you're not making enough money on each of the products that you sell. Relying on a cost advantage that is not sustainable because rival firms can easily copy or overcome it. Again, I touched on that earlier, what we generally find is that low-cost provider strategy is easy to imitate because if somebody can drop their price, if you can drop your price, well then so can your competitor; so it's often difficult to find a sustainable competitive advantage through cost advantage alone. Becoming too fixated on cost reductions such that the firm's offering is too features-poor to gain the interest of buyers. Geely, that we talked about on the first slide, is a good example here of a company who has focused so much on just being the cheapest car out there, that they've forgotten that buyers actually want things that are considered attractive, or good, positive, strong features in their vehicles. Finally, having a rival discount, or discover, rather, a new lower-cost value chain approach or develop a cost-saving technological breakthrough. As I've touched on a couple of times now, it is more difficult to create an innovation, a new way of doing things, that is more cheap, that will lower cost, than it is through offering a differentiated or unique product. It's more difficult to find a sustainable competitive advantage through this strategy than it is, probably, through a differentiation strategy. Speaking of differentiation strategy, we're going to look at that on the next video.

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Duration: 8 minutes and 49 seconds
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Language: English
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Posted by: christineward on Apr 6, 2016

Business-Level Strategy- Low-Cost Provider Strategy

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