Cost Reduction Dangers

Firms who choose a competitive strategy based on cost reduction due to either experience or scale must consider a difficult tradeoff: whether to choose cost-price efficiency over noncost-price marketing effectiveness.

A firm which chooses to pursue cost efficiency can  run into difficulty if end up offering a low-cost product which few customers want. In this case, the lack of demand reduces total revenue and short-circuits the attempt to achieve lower costs through either experience or scale by reducing volume.

Efficiency strategies make sense when there are significant cost advantages to be had from either experience or scale, and there are market segments with a critical mass of buyers that will reward a supplier offering a low price. In addition, the firm pursuing efficiency must consider how well equipped it is to pursue an efficiency strategy. This means have the necessary managerial, technological and financial resources with which to pursue cost reductions through either experience or scale.

Low price achieved through low cost is not always valued by the marketplace. In addition, firms can go too far with cost reduction initiatives and lose their ability to respond to changes in their environment. This is particularly true if experience is the source of cost reductions: the increased specialization required makes it difficult for an organization to adapt and respond to innovations or changes introduced by rivals. Similarly, while Lean processes can be efficient, if carried too far they may become anorexic and unable to respond to changes in  customer preferences and tastes.

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