Page 261 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes
Did u know? Success in achieving cost advantages over rivals comes from exploring all
avenues for reducing costs and pressing for continuous cost reductions across all aspects of
the company’s value chain year after year.

A competitive strategy predicated on low-cost leadership is particularly powerful when:
1. Price competition among rival sellers is especially vigorous.
2. The products of rival sellers are essentially identical and supplies are readily available
from any of several eager sellers.
3. There are few ways to achieve product differentiation that have value to buyers.
4. Most buyers use the product in the same ways.
5. Buyers incur low costs in switching their purchases from one seller to another.
6. Buyers are large and have significant power to bargain down prices.

7. Industry newcomers use introductory low prices to attract buyers and build customer
base.
The pitfalls of a low-cost provider strategy are:

1. The biggest pitfall of a low-cost provider strategy is getting carried away with overly
aggressive price cutting and ending up with lower, rather than higher, profitability.
2. A second pitfall is not emphasising avenues of cost advantage that can be kept proprietary
or that relegate rivals to playing catch-up. The value of cost advantage depends on its
sustainability. Sustainability, in turn, hinges on whether the company achieves its cost
advantage in ways difficult for rivals to copy or match.
3. A third pitfall is becoming too fixated on cost reduction. Low cost cannot be pursued so
zealously that a firm’s offering ends up being too-features-poor to generate buyer appeal.
4. A company driving hard to push its cost down has to guard against misreading or ignoring
increased buyer interest in added features or service, declining buyer sensitivity to priced
or new developments that start to alter how buyers use the product.

Self Assessment

State whether the statements are true or false:
3. Success in achieving cost advantages over rivals comes from exploring all avenues for
reducing costs and pressing for continuous cost reductions across all aspects of the company’s
value chain year after year.
4. The biggest pitfall of a low-cost provider strategy is getting carried away with overly
aggressive price cutting and ending up with lower, rather than lower, profitability.

14.3 Differentiation Strategies

The essence of a differentiation strategy is to be unique in ways that are valuable to customers
and that can be sustained.
Successful differentiation allows a firm to:

 Command a premium price for its product, and/or

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