Race to zero

Being the lowest cost provider can never be a long-term strategy. By definition it is a race to the bottom. Agree?

Let me clarify… If ‘lowest cost provider’ is your only strategy, your business is doomed. Why? Cause you can cut costs only so much.

Of course it is only right to cut off the fat. And every business should be doing it routinely (but it does not have to be part of its strategic equation). If you focus most of your efforts and wit on costs, however, and go beyond the fat, starting slicing the muscles off, you will have the skeleton in the long run. Then your business is simply dead.

Low price (and presumably low cost) is a good strategy to rapidly penetrate markets. This, however, has to be coupled with an innovation machine, constantly and continuously spitting out new products and services to its customers. The trick is to avoid commoditization. A good example of a company successfully pursuing such strategy is Amazon. If you can’t – read the paragraph above.

There are actually very few businesses, which declare ‘lowest cost provider’ as their strategy nowadays. The last one I remember was Compaq… Where is it now? Although, it is rare for a business leader to proclaim ‘lowest cost provider’ as a strategy, if you look at daily practices, there are plenty of businesses, which practice it even without preaching it.

They will probably never admit it, but those businesses are usually obsessed about their bottom line rather than customers. Typical excuse – we do it, since under competitive pressure we couldn’t find a better way… yet, we have to deliver results. The leadership of such organisations has forgotten the reason they exist! (have a look here).

They routinely cut costs because that’s the ‘easiest’ and fastest way to achieve profit objective…  short term though. More dramatically – they believe their objective is to churn out certain profit. Sadly, customer is not even in the picture.

Stay away from those businesses.

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