UNIT IV

COST FOCUS AND PREEMPTIVE MOVE

STRATEGY
 Cost Leadership Strategy
• Objective:
– Gain sustainable competitive advantage over competitors, using low-
cost (not price).
– Produce for broad customer base.

• Keys to Success:
– Low-cost relative to competitors

• Low cost implies OVERALL LOW COST

• Not just low manufacturing or production cost
• Product quality cannot be ignored
Successful Pursuit of Cost Leadership
Strategy
• Every strategic decision is aimed at keeping
cost as low as possible
• Efficiency is sought in all areas of operation
• All functional strategies & capabilities are
directed at efficiency
• Doesn’t have deep & wide product lines
• Market products aimed at “average” customer
• Little or no product frills or differences
 Examples
• Wal-Mart Stores Inc. has been successful using its strategy of
everyday low prices to attract customers. The idea of everyday low
prices is to offer products at a cheaper rate than competitors on a
consistent basis, rather than relying on sales. Wal-Mart is able to
achieve this due to its large scale and efficient supply chain. They
source products from cheap domestic suppliers and from low-wage
foreign markets. This allows the company to sell their items at low
prices and to profit off thin margins at a high volume.
• McDonald's :The restaurant industry is known for yielding low
margins that can make it difficult to compete with a cost leadership
marketing strategy. McDonald's has been extremely successful with
this strategy by offering basic fast-food meals at low prices. They are
able to keep prices low through a division of labor that allows it to hire
and train inexperienced employees rather than trained cooks. It also
relies on few managers who typically earn higher wages. These staff
savings allow the company to offer its foods for bargain prices.
When Cost Leadership Works Best
– Price competition is vigorous.
– Product is standardized or readily available from many suppliers.
– There are few ways to achieve differentiation that have value.
– Most buyers use product in same ways.
– Buyers are price sensitive.
– Buyers are large and have significant bargaining power.
Drawbacks of Cost Leadership Strategy

• Being overly aggressive in cutting price.

• Low cost methods are easily imitated by rivals.
• Becoming too fixated on reducing costs and
ignoring
– Buyer interest in additional features (tastes)
– Declining buyer sensitivity to price
– Changes in how the product is used

• Technological breakthroughs open up cost

reductions for rivals
 PREEMPTIVE MOVE
• The preemptive move is a strategic move directed at
obtaining the first mover advantage, which the
competitors are unable to duplicate or counter. Only a
technologically and financially superior firm can
implement this strategy. Preemptive moves can be
directed at products, production systems, customers,
distribution and service systems.
Cont.……..
• Products : A firm can implement preemptive move by
introducing a new product to the market. The firm can
enjoy a desirable market position. Microsoft in software
and Intel in the computer processor have always enjoyed
the leadership position through their product innovation.
• Production Systems : Introduction of a cost-effective or
high-productivity production systems can generate
substantial SCA for the firm. The Japanese have always
enjoyed competitive advantage in this form of preemption
in the fields of electronics and robotics.
Cont.…..
• Customers : The preemptive move can be focused on a
customer group and obtain their loyalty, which is a strong
SCA factor. (Aquaguard)
• Distribution and Service Systems : The preemptive
move can be focused on a new distribution system and
reach more effectively the target customers than its
competitors. The firm can use its distribution network to
provide customer services that generate an effective SCA
factor. (Ambay)
Implementing the Preemptive Move
• The preemptive move is fully based on innovation.
• Copying and duplicating competitors does not result in
any preemption.
• Every preemptive move requires substantial investments
in R&D.
• Preemption also entails a high degree of risk.
• Nevertheless, the profit potential from preemption is also
very high. Preemption also creates very high entry
barriers and prevents competitors from copying and
duplicating actions of the first-mover.