What companies use best cost strategy?

As a concept, Best-Cost means high quality and low price of a product. This term is used to indicate a situation where the company tries to achieve the best (lowest) cost relative to the competitors who offer similar products and simultaneously tries to improve quality.

The best-cost strategy is the strategy of increasing the quality of products while reducing costs. This strategy is applied to give customers “more value for the money.”

It is achieved by satisfying customers’ expectations on key attributes of products. At the same time, prices are charged lower than the competitors.

By following the best-cost strategy, the company attempts to attract the ‘value-conscious buyers’ (those buyers who want a superior product at a lower price).

This strategy is a hybrid. It balances a strategic emphasis on low-cost against a strategic emphasis on differentiation which is understandable.

It is considered as the most powerful competitive strategy of all. It presupposes ‘relentlessly striving to become a lower-and-lower cost provider of a higher-and-higher caliber product.’ Toyota Company of Japan followed the best-cost strategy for its Lexus cars to beat Mercedes-Benz and BMW cars.

Best-Cost Strategy Defined

As a concept, best-cost means high quality and low price of a product.

This term is used’ to indicate a situation where the company tries to achieve the lowest cost relative to the competitors who offer similar products and simultaneously tries to improve quality.

Best-cost provider strategy is often called ‘best-cost strategy’,

The best-cost strategy is the strategy of increasing the quality of products while reducing costs. This strategy is applied to give customers “more value for the money.”

It is achieved by satisfying customers’ expectations on key attributes of products. At the same time, prices are charged lower than that of the competitors.

By following the best-cost strategy, the company attempts to attract the Value conscious buyers’ (those buyers who want a superior product at a lower price).

The best-cost strategy is a hybrid. It balances a strategic emphasis on low-cost against a strategic emphasis on differentiation. It is considered as the most powerful competitive strategy of all.

It presupposes ‘relentlessly striving to become a lower-and-lower cost provider of a higher-and-higher caliber product.’ Toyota Company of Japan followed the best-cost strategy for its Lexus cars to beat Mercedes-Benz and BMW cars.

Examples of Best-Cost Strategy

Although Toyota Motor Company is known for its low-cost strategy, it applied the best-cost strategy when it manufactured its luxury-car Lexus models. To compete against such luxury-car makers as BMW and Mercedes-Benz, Toyota management started making Lexus a car with premium-quality at costs below those of competitors.

Toyota’s best-cost strategy was so successful that the Lexus model was ranked among the top 10 models and the second best-selling luxury brand in the US market.

Another example is Microsoft Corporation.

Microsoft is widely recognized as the committed user of the best-cost strategy in software. This world-famous IT-giant is continually improving the quality of its software and at the same time continually reducing the costs of its software products.

Market Situations Favorable for Best-Cost Strategy

A number of factors affect the successful implementation of the best-cost strategy. These market-related factors need to be attended properly by marketers.

We present here some of the most dominant market-related issues or market situations where the best-cost strategy is likely to work best.

Buyer diversity

The best-cost strategy will work very well in a market where product differentiation becomes the norm because of buyer diversity, and also a substantial number of buyers are sensitive to price and quality.

Positioning advantage

A company with a best-cost strategy can position itself near the middle of the market – with a medium- quality product at a below-average price, or with a very good product at a medium price.

Many buyers may prefer mid-range products. They avoid cheap, basic products of low-cost producers. They also avoid expensive products of top quality.

Resources and capabilities

The best-cost strategy will work best when the company has the resources, know-how, and capabilities to incorporate upscale product attributes at a lower cost.

This strategy is ill-advised if the resources and capabilities do not permit the company to manage costs down and product caliber up.

Reasons for Failure of Best-Cost Provider Strategy

It is easy to say to be a best-cost provider, but it is really a tough job to really become a best-cost provider in the marketplace. In order to be successful, the company must have the following resources and capabilities to simultaneously lower down posts and improve quality;

• It must have the resources: and competitive capabilities to achieve high quality at a lower cost than the competitors.
• It must be able to incorporate appealing (attractive) features at a lower cost than competitors (such as ‘good-to-excellent product performance or quality’)

• it must provide good-to-excellent customer service at a lower cost than competitors.

When a firm cannot fulfill these conditions or after initial fulfillment of the conditions fails to continue, it is likely to fail in gaining the advantage from the best cost strategy.

Some executives are not content to have their firms compete based on offering low prices or unique features. They want it all! Firms that charge relatively low prices and offer substantial differentiation are following a best-costA business-level strategy followed by firms that charge relatively low prices and offers substantial differentiation. strategy (Figure 5.9 "Best-Cost Strategy"). This strategy is difficult to execute in part because creating unique features and communicating to customers why these features are useful generally raises a firm’s costs of doing business. Product development and advertising can both be quite expensive. However, firms that manage to implement an effective best-cost strategy are often very successful.

Target appears to be following a best-cost strategy. The firm charges prices that are relatively low among retailers while at the same time attracting trend-conscious consumers by carrying products from famous designers, such as Michael Graves, Isaac Mizrahi, Fiorucci, Liz Lange, and others. This is a lucrative position for Target, but the position is under attack from all sides. Cost leader Walmart charges lower prices than Target. This makes Walmart a constant threat to steal the thriftiest of Target’s customers. Focus differentiators such as Anthropologie that specialize in trendy clothing and home furnishings can take business from Target in those areas. Deep discounters such as T.J. Maxx and Marshalls offer another viable alternative to shoppers because they offer designer clothes and furnishings at closeout prices. A firm such as Target that uses a best-cost strategy also opens itself up to a wider variety of potentially lethal rivals.

According to government statistics, women are 60 percent less likely than men to become entrepreneurs. Meanwhile, succeeding within the specialty fashion retailing market is notoriously difficult. These trends do not worry Sarah Reeves, a young entrepreneur and 2007 graduate of Auburn University who is rapidly becoming a key player within the Austin, Texas, retail scene by offering high-end fashion at low prices.

On her website (http://www.plainiveyjane.com), Sarah describes Plain Ivey Jane as “the go-to place for women who want to elevate their wardrobes. We offer high end designer names at a discount, and the new overstocked apparel is handpicked from over 70 different brands to offer exactly what Austin needs at a price every girl can afford. To pair with your fabulous new wardrobe, Plain Ivey Jane carries accessories from undiscovered local artisans.” We asked Reeves to discuss her firm.

One route toward a best-cost strategy is for a firm to adopt a business model whose fixed costs and overhead are very low relative to the costs that competitors are absorbing (Figure 5.10 "Driving toward a Best-Cost Strategy by Reducing Overhead"). The Internet has helped make this possible for some firms. Amazon, for example, can charge low prices in part because it does not have to endure the expenses that firms such as Walmart and Target do in operating many hundreds of stores. Meanwhile, Amazon offers an unmatched variety of goods. This combination has made Amazon the unquestioned leader in e-commerce.

Another example is Netflix. This firm is able to offer customers a far greater variety of movies and charge lower prices than video rental stores by conducting all its business over the Internet and via mail. Netflix’s best-cost strategy has been so successful that $10,000 invested in the firm’s stock in May 2006 was worth more than $90,000 five years later.

Moving toward a best-cost strategy by dramatically reducing expenses is also possible for firms that cannot rely on the Internet as a sales channel. Owning a restaurant requires significant overhead costs, such as rent and utilities. Some talented chefs are escaping these costs by taking their food to the streets. Food trucks that serve high-end specialty dishes at very economical prices are becoming a popular trend in cities around the country. In Portland, Oregon, a food truck called the Ninja Plate Lunch offers large portions of delectable Hawaiian foods such as pulled pork for around $5. Another Portland food truck is PBJ’s, whose unique and inexpensive sandwiches often center on organic peanut butter. Beyond keeping costs low, the mobility of food trucks offers important advantages over a traditional restaurant. Some food trucks set up outside big-city nightclubs, for example, to sell partygoers a late-night snack before they head home.

Key Takeaway

• 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.

Exercises

1. What is an example of an industry that you think a best-cost strategy could be successful? How would you differentiate a company to achieve success in this industry?
2. What is an example of a firm following a best-cost strategy near your college or university?