Question

A popular restaurant operates in a busy area of town. The drinks and happy hour specials are cheaper than any other restaurant in the area. The owners of the bar have trouble keeping prices low, as rent in the area seems to increase. They need to keep prices low to bring in customers, but increasing expenses reduce profit. This is a common disadvantage of ______________.

Focused leadership
Cost leadership
Differentiation leadership
Profit leadership
Economies of scale

Answer 1

The common disadvantage described is cost leadership, where a business struggles to keep prices low while expenses increase.

Step-by-step explanation:

The common disadvantage described in the question is Cost leadership.

Cost leadership is a business strategy where a company aims to have the lowest costs in the industry, allowing them to offer products or services at lower prices than their competitors. However, the disadvantage of cost leadership is that if expenses keep increasing, such as rent in this case, it becomes difficult to keep prices low and maintain profitability.

Economies of scale is a related concept where the cost per unit decreases as the quantity of output increases. It helps explain why larger factories can produce at a lower average cost than smaller factories.

Answer 2

The difficult situation that the described restaurant finds itself in represents the disadvantage of a cost leadership strategy, where balancing low prices and increasing expenses can be challenging. Companies must continuously seek efficiency improvements and can also benefit from economies of scale to maintain cost leadership.

Step-by-step explanation:

The scenario described is a common disadvantage of cost leadership. Cost leadership is a business strategy aimed at achieving the lowest operational cost and lowest prices in the industry to gain a competitive advantage. However, when input costs like rent increase, maintaining low prices while still making a profit becomes a challenge. This reflects the delicate balance a firm must maintain to succeed in a cost leadership approach, especially when external factors, such as increasing rents, impact operational costs.

Moreover, businesses might face increased competition if their products or services are profitable, tempting other firms to enter the market. This could potentially reduce the original firm's profits or even drive it out of the market. Therefore, companies engaged in cost leadership must also continuously explore ways to improve efficiency and reduce costs without sacrificing quality or customer service.

Additionally, in the context of economies of scale, as a firm increases production, the cost per unit should decrease. This principle works well for firms like Costco or Walmart, where large quantities and bulk operations allow for lower average costs. However, for smaller operations that do not benefit as much from economies of scale, cost leadership becomes a difficult strategy to maintain over time when facing increasing input costs.