Schweser Book 4, Reading 41 p. 83 It states one of the main risks that a firm using the cost leadership strategy runs is not acheiving differentiation parity BECAUSE OF COST PRESSURES. I understand the risk of not getting the diffentiation parity but don’t get the cost pressures part. What would that have to due with product differentiation? From my understand the whole idea is that you want your product to look like the others on the shelf, you sell it for about the same price…maybe a little lower, but you have a lower cost structure so you make above avg profits. What am I missing?
That could mean probably that you spent so much on making your product differentiable from others, that you end up not being the low-cost producer which is needed for cost-leadership strategy
Cost leadership goes beyond setting a low price. A cost leader is able to sell products for a low price because they also have low production costs. If the cost leader tries to cut to many corners in order to cut costs, all of the sudden they may end up with a crap product (ie not achieving differentiation parity).
I can only think of one scenario. The cost leader produces some product that is similar to some other product but they can produce it cheaper. Some input becomes too expensive and the cost leader resorts to a crappier input to keep the same profit margin. Now you have one crappy cheap product and some other less crappy product. People will buy the less crappy product. I wanted to not post this, but I reread it and just thought wow, did I just think that. Sorry for wasting 1 minute of anyone’s time haha. Edit: Mcleod81, you beat me to it, but I think we have the same general idea. I didn’t get to see your post before I put up mine, but its funny we both used crap in the example.
dinesh.sundrani Wrote: ------------------------------------------------------- > That could mean probably that you spent so much on > making your product differentiable from others, > that you end up not being the low-cost producer > which is needed for cost-leadership strategy dinesh, in this case you wouldn’t be trying to make your product any different than others. In fact you want it to look the same (diff parity), but be able to bring it to market with lower costs.
McLeod and Niblita75, I think I get what you are saying. That seems to work.
Niblita75 Wrote: ------------------------------------------------------- > I can only think of one scenario. The cost leader > produces some product that is similar to some > other product but they can produce it cheaper. > Some input becomes too expensive and the cost > leader resorts to a crappier input to keep the > same profit margin. Now you have one crappy cheap > product and some other less crappy product. People > will buy the less crappy product. > > I wanted to not post this, but I reread it and > just thought wow, did I just think that. Sorry for > wasting 1 minute of anyone’s time haha. > > Edit: Mcleod81, you beat me to it, but I think we > have the same general idea. I didn’t get to see > your post before I put up mine, but its funny we > both used crap in the example. I think at this point “crap” is the most descriptive word that I can think of after 3 months of nothing but CFA / work / CFA / work / repeat… It seems that my brain is getting rid of some finer skills such as vocabulary and etiquette in order to make room for more FSA and Time Series knowledge.
It makes me think of dollar store cars that I get my son that break after 25 mins. I still buy them because that is all the longer he will care about it anyway.
mwvt9 Wrote: ------------------------------------------------------- > It makes me think of dollar store cars that I get > my son that break after 25 mins. I still buy them > because that is all the longer he will care about > it anyway. There are pieces of broken $0.20 cars all over my living room floor as we speak. I have found that the opportunity cost of picking up the wheels and stepping on the broken car frames in the middle of the night outweighs the $1.40 premium on buying hot wheels instead.
HEY mwvt9–i have seen your name here many times, but when you said Dollar Store, i have to ask…there is a Dollar store in manchester VT that i go to to get the same kind of “expendable” type things…you aren’t by any chance in manchester VT are you?
No. Sorry, Pittsburgh, PA. I am a Hokie…VT.
gotcha…guess there is more than one dollar store in the US.