Best-Cost Strategy – Mastering Strategic Management

A best-cost strategy can be an effective business-level strategy to the extent that a firm offers differentiated goods and services at relatively low prices. Skiptocontent Chapter5:SelectingBusiness-LevelStrategy Best-CostStrategy Describethenatureofabest-coststrategy. Understandwhyexecutingabest-coststrategyisdifficult. TheChallengeofFollowingaBest-CostStrategy Someexecutivesarenotcontenttohavetheirfirmscompetebasedonofferinglowpricesoruniquefeatures.Theywantitall!Firmsthatchargerelativelylowpricesandoffersubstantialdifferentiationarefollowingabest-cost strategy(Figure5.19“Best-CostStrategy”).Thisstrategyisdifficulttoexecuteinpartbecausecreatinguniquefeaturesandcommunicatingtocustomerswhythesefeaturesareusefulgenerallyraisesafirm’scostsofdoingbusiness.Productdevelopmentandadvertisingcanbothbequiteexpensive.However,firmsthatmanagetoimplementaneffectivebest-coststrategyareoftenverysuccessful. Figure5.19Best-CostStrategy[Imagedescription] Targetappearstobefollowingabest-coststrategy.Thefirmchargespricesthatarerelativelylowamongretailerswhileatthesametimeattractingtrend-consciousconsumersbycarryingproductsfromfamousdesigners,suchasMichaelGraves,IsaacMizrahi,Fiorucci,LizLange,andothers.ThisisalucrativepositionforTarget,butthepositionisunderattackfromallsides.CostleaderWalmartchargeslowerpricesthanTarget.ThismakesWalmartaconstantthreattostealthethriftiestofTarget’scustomers.FocusdifferentiatorssuchasAnthropologiethatspecializeintrendyclothingandhomefurnishingscantakebusinessfromTargetinthoseareas.DeepdiscounterssuchasWinnersandMarshallsofferanotherviablealternativetoshoppersbecausetheyofferdesignerclothesandfurnishingsatcloseoutprices.AfirmsuchasTargetthatusesabest-coststrategyalsoopensitselfuptoawidervarietyofpotentiallylethalrivals. IKEA Figure5.20:TheSwedishfurnitureretailerIkearevolutionizedthefurnitureindustrybyofferingcheapbutstylishfurniture. IKEAisaSwedishcompanyregisteredintheNetherlandsthatdesignsandsellsready-to-assemblefurniture(suchasbeds,chairs,anddesks),appliances,andhomeaccessories.Since January2008,thecompany hasbeen theworld’slargestfurnitureretailer.IkeawasfoundedinSwedenin1943bythen-17-year-oldIngvarKamprad,whowaslistedasoneoftheworld’srichestpeoplein2013.Kampard’sfortunepeakedat$33billion,buthehastransferredthevastmajorityofhiseconomicstakeintheretailertohisphilanthropicfoundations.Thecompanyisknownforitsmodernarchitecturaldesignsforvarioustypesofappliancesandfurniture,anditsinteriordesignworkisoftenassociatedwithaneco-friendlysimplicity. Inaddition,thefirmisknownforitsattentiontocostcontrol,operationaldetails,andcontinuousproductdevelopment,corporateattributesthatallowedIKEAtoloweritspricesbyanaverageof2 to3 percentoverthedecadeto2010duringaperiodofglobalexpansion. IKEA revolutionizedthefurnitureindustrybyofferingcheapbutstylishfurniture.Ikeaisabletokeepitspriceslowbysourcingitsproductsinlow-wagecountriesandofferingaverybasiclevelofservice.Ikeawillassembleordeliverfurnitureforanadditionalcost;otherwise,customersmustcollectthefurnitureinthewarehouseandassembleathomethemselves.Whilethisislessconvenientthantraditionalretailers,itallowsIkeatoofferlowerpricesthatattractcustomers(Scilly,n.d.). AsofJanuary2014,IKEAownsandoperatesstores in26countries,with 227ofits298storesinEurope.Itsells9,500productsanditsstoresreceived690millionstorevisitsin2013.Thecompanyusesapproximately1 percent oftheEarth’swoodsupply,makingitoneofthelargestusersofwoodintheretailsector(Wikipedia,n.d.). PursuingtheBest-CostStrategythroughaLow-OverheadBusinessModel Oneroutetowardabest-coststrategyisforafirmtoadoptabusinessmodelthathasverylow fixedcostsandoverheadrelativetothecoststhatcompetitorsareabsorbing(Figure5.21“DrivingtowardaBest-CostStrategybyReducingOverhead”).TheInternethashelpedmakethispossibleforsomefirms.Amazon,forexample,canchargelowpricesinpartbecauseitdoesnothavetoenduretheexpensesthat“bricksandmortar”retailerssuchasWalmartandTargetdoinoperatingmanyhundredsofstores.Alone,thiswouldbealow-coststrategy.However,Amazonalsooffersanunmatchedvarietyofgoods.ThiscombinationhasmadeAmazontheunquestionedleaderine-commerceinNorthAmerica. Figure5.21DrivingtowardsaBest-CostStrategybyReducingOverhead[Imagedescription] AnotherexampleisNetflix.ThisfirmisabletooffercustomersafargreatervarietyofmoviesandchargelowerpricesthanvideorentalstoresbyconductingallitsbusinessovertheInternetandviamail.Netflix’sbest-coststrategyhasbeensosuccessfulthat$10,000investedinthefirm’sstockinMay2006wasworthmorethan$90,000fiveyearslateraccordingtoStandard&Poor’sstockreportonNetflix. Figure5.22:HeyCupcake!inAustin,Texas,isalow-overheadbakerythathasbecomeadelicioussuccess. Movingtowardabest-coststrategybydramaticallyreducingexpensesisalsopossibleforfirmsthatcannotrelyontheInternetasasaleschannel.Owningarestaurantrequiressignificantoverheadcosts,suchasrentandutilities.Sometalentedchefsareescapingthesecostsby takingtheirfoodtothestreets.Foodtrucksthatservehigh-endspecialtydishesatveryeconomicalpricesarebecomingapopulartrendincitiesaroundthecountry. InVancouver,B.C.,theJAPADOGfoodtrucksofferhotdogswithnon-traditionaltoppingssuchasslicedonionwithspecialplumsauce,oritssignaturehotdogwith teriyakisauce,mayo,andseaweed,each forabout$5(JAPADOG,2014).Richmond,B.C.,asuburbofVancouver,holds itsverypopular summer-longInternationalNightMarket,whichincludesbothretailandfoodvendors(RichmondNightMarket,2014). Iflocalbylawspermit,somecities’foodtruckschangelocationsandsendouttheirspot-for-the-day(orevening) onTwitter(somefoodtruckpermitsareforonelocationonly).Beyondkeepingcostslow,themobilityoffoodtrucksoffersanotheradvantageoveratraditionalrestaurantinthattheycanchangelocationtoservedifferentclients.Forexample,foodtruckscanselllunchdowntownandanafternoonsnacknearthesubwayandthenmovetothenightclubareaofthecitytosellpartygoersalate-nightsnackbeforetheyheadhome. Abest-coststrategycanbeaneffectivebusiness-levelstrategytotheextentthatafirmoffersdifferentiatedgoodsandservicesatrelativelylowprices. Whatisanexampleofanindustrythatyouthinkabest-coststrategycouldbesuccessful?Howwouldyoudifferentiateacompanytoachievesuccessinthisindustry? Whatisanexampleofafirmfollowingabest-coststrategynearyourcollegeoruniversity? References JAPADOG.(2014).JapanesestyleHotdog inCanada.Retrievedfrom http://www.japadog.com/ RichmondNightMarket.(2014).TheOfficialRichmondNightMarket2014.Retrievedfrom http://www.richmondnightmarket.com/ Scilly,M.(n.d.).ExamplesofCostLeadership&StrategyMarketing.Retrievedfrom http://smallbusiness.chron.com/examples-cost-leadership-strategy-marketing-12259.html Wikipedia. (n.d.).IKEA.Retrievedfrom http://en.wikipedia.org/wiki/IKEA Imagedescriptions Figure5.19imagedescription:Best-CostStrategy Firmsthatchargerelativelylowpricesandoffersubstantialdifferentiationarefollowingabest-coststrategy.Thisstrategyisdifficulttoexecute,butitisalsopotentiallyveryrewarding.Severalexamplesoffirmspursuingabest-coststrategyareillustratedbelow. WestJetAirlinesprovideslow-costflightstovacationdestinationssuchasMexico,Bermuda,Jamaica,andTrinidad.Whilemanyairlinesmakepassengersfeellikecattleloadedontoatruck,WestJetcreatesfunbygettingchildrenexcitedaboutvisitingDisneyWorldwhentheyseetheirWestJetMagicPlane. ChipotleMexicanGrillreliesonorganicingredientstocreateverytastyburritosthataresoldatpricescomparabletothoseoffast-foodrestaurants.Whennoonarrives,manyhungrypeopleprefertospendtheirlunchdollarsonatop-shelfburritoratherthanagreasyburgercombomeal. Targetoffersextremelycompetitiveprices,butthefirmalsodifferentiatesitselffromotherdiscountretailersbycarryingproductsfromtrendydesignerssuchasMichaelGraves,IsaacMizrahi,Fiorruci,andLizLange. PabstBlueRibbonisofferedatanextremely lowpriceanditstasteiscomparableto otherinexpensivebeers.“PBR”enjoysbrand loyalty,however,duetoitshighname recognition.ThefrequentappearanceofPBR’s well-knownlogoonsigns,T-shirts,andother merchandisehashelpedmakePBRan enduringfavouriteamongbeerconsumers withlightwallets. ReturntoFigure5.19 Figure5.21imagedescription:DrivingtowardsaBest-CostStrategybyReducingOverhead Manyfirmswouldliketouseabest-coststrategybutstruggletomeetthestrategy’sdualrequirementsofcharginglowpricesandprovidingdifferentiationfeatures.Onewaytotohelpmakebestcostarealityistouseabusinessmodelthatslashesfixedcosts.Amazon.com/forexample,canchargelowpricesinpartbecauseitdoesnothavetoabsorbtheoverheadinvolvedinoperatingstores.Similarly,sometalentedchefsarepursuingabest-coststrategybyoperatingfoodtrucksandtherebyavoidingtheoverheadrequiredtorunarestaurantsuchasrentandutilities.Severalexamplesareillustratedbelow. YamaGoyarestaurantinFernie,B.C.goesontheroadwithitssolar-poweredmobilesushiexperience,cateringmusicfestivals,weddings,ordowntownlocations.FoodiesfollowonTwitterfortheday’slocation. VikramVijisarestaurateur,chef,andcookbookauthorinVancouver.AlongWithhisbricks-and-mortarrestaurantsVij’sandRangoli,heoperatesVij’sRailwayExpressfoodtruck,aswellassellingpre-packagedgourmetcurriesingrocerystoresacrossB.C.andotherregions. RumorhasitthatArturo’sservesuponemeanTortillaSoupatonly$3!ThiscomfortingsoupisperfectforoneofthosecloudyVancouverdays. WestCoastPoutineisactuallyaTorontofoodtrucksellingtwo-pound,gourmetpoutine,aswellassignaturesandwiches.Lookforthesummeryorangeandwhitetruckpimpedoutwithfauxlow-riderdetails. ReturntoFigure5.21 MediaAttributionsFigure5.19:Attributioninformationforallincludedimagesisinthechapterconclusion.IKEAofSweden©HåkanDahlströmislicensedunderaCCBY(Attribution)licenseFigure5.21:Attributioninformationforallincludedimagesisinthechapterconclusion.HeyCupcake!©EvanBenchislicensedunderaCCBY(Attribution)licenseAbusiness-levelstrategyfollowedbyfirmsthatchargerelativelylowpricesandofferssubstantialdifferentiation. Previous:FocusedCostLeadershipandFocusedDifferentiation Next:StuckintheMiddle Backtotop License MasteringStrategicManagement-1stCanadianEditionbyJaniceEdwardsislicensedunderaCreativeCommonsAttribution-NonCommercial-ShareAlike4.0InternationalLicense,exceptwhereotherwisenoted. ShareThisBook ShareonTwitter