Strategic management techniques used in formulating a strategy analyzes both the external environment and internal capability. Therefore, for a company to establish a lowering of costs to be a strategy they ought to have considered several external and internal circumstances discussed below. When buyers possess higher bargaining power, suppliers are more compelled to lower their prices as a strategic move to gain a competitive advantage in such a market (Dyer et al., 2016, p.28). Buyers can have high bargaining power when the following factors are present; concentration of buyers in one segment. When buyers are concentrated in a specific location and also few, suppliers tend to compete to make a sale. Such intense competition makes low-cost provider a good strategy (Baroto et al., 2012). Low-cost can also be an ideal strategy when buyers are price-sensitive (Dyer et al., 2016, p.29). Price-sensitivity compels suppliers to reconsider revising their prices to gain competitive advantage and acceptance from the buyers.
The marker constantly evolves, so as the supply chain and the products. The introduction of new substitute products is a great threat to the company’s performance in a given market (Dyer et al., 2016, p.32). Provided the substitute products perform the same function as the ones already established in the market and comes with a less price, then it is time for adopting a low-cost provider strategy (Dyer et al., 2016, p.32). The risk of not considering a low-cost provider strategy in a situation like this is tremendously high, on a worst-case scenario a company will risk being phased out of business (Gamble et al., 2019). However, it is prudent to analyze these external factors exhaustively and establish internal capabilities before proceeding with a low-cost provider strategy (Aaker & Moorman, 2018). Therefore, companies involved should ensure that low-cost provider strategy is the appropriate counter move, before making any decisions.
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Despite a low-cost provider strategy being effective in achieving competitive advantage, it comes with a lot of shortcomings. The company considering this strategy should be armed with huge capital investment, to pump into the manufacturing and production processes. One might gain access to a huge percentage of the market, but that comes with a price (Thompson et al., 2014). The company will be forced to produce more to satisfy the ballooning number of customers, hire more staff both in the production and marketing departments. The adoption of a low-cost provider strategy is bound to hurt the company’s brand in the long-term (Hitt et al., 2016). Therefore, before going ahead with this strategy, management should consider their brand strategy and establish how lowering prices could affect their brand in the end. Customers, may perceive this negatively and assume that the quality of the products produced is compromised. In the process, a brand might take a nosedive, which will take years to repair and a lot of resources as well.
References
Aaker, D., & Moorman, C. (2018). Strategic market management . New Jersey: John Wiley & Sons, Inc.
Baroto, M., Abdullah, M., & Wan, H. (2012). Hybrid Strategy: A New Strategy for Competitive Advantage. International Journal of Business and Management , 7 (20), 120-133. https://doi.org/http://dx.doi.org/10.5539/ijbm.v7n20p120
Dyer, J., Godfrey, P., Jensen, R., & Bryce, D. (2016). Strategic Management: Concepts and Tools for Creating Real World Strategy (pp. 20-236). New Jersey: John Wiley & Sons.
Gamble, J., Thompson, A., & Peteraf, M. (2019). Essentials of strategic management . New York: McGraw-Hill Irwin.
Hitt, M., Ireland, R., & Hoskisson, R. (2016). Strategic Management: Concepts and Cases: Competitiveness and Globalization (12th ed.). Boston, MA: Cengage Learning.
Phadtare, M. (2010). Strategic Management: Concepts and Cases . New Delhi: PHI Learning.
