Question

While low-cost providers are champions of frugality, they:

A. seldom hesitate to spend aggressively on resources and capabilities that promise to drive costs out of the business.
B. are never hesitant to eliminate costs so as to remain the low-cost provider.
C. are not blinded by cost reduction, preferring product differentiation strategies that reflect cost-reductions rather than buyer needs and wants.
D. are also champions of profitability by having prices lower than costs to gain volume gains.
E. always anticipate negative feedback from stakeholders because of their spending habits.

Answer 1

Low-cost providers focus on spending to reduce operational costs, aiming to remain competitive and retain their low-cost status. They invest in areas that promise cost reduction, balancing cost leadership with meeting consumer demands and ensuring profitability.

Step-by-step explanation:

While low-cost providers are champions of frugality, they seldom hesitate to spend aggressively on resources and capabilities that promise to drive costs out of the business. This characteristic allows them to maintain their position as low-cost providers within a competitive market. For instance, a low-cost airline might drastically reduce ticket prices to outcompete a new entrant, thereby maintaining its market share and, after eliminating the competition, potentially increasing prices again. This strategy shows a commitment to keeping costs low but doesn’t necessarily reflect a blind focus on cost reduction without regard for product differentiation or consumer needs. By investing in ways to reduce operational costs, such as through economies of scale or technological innovation, businesses can continue to offer lower prices while still meeting consumer demands and ensuring profitability.

Companies strive for profits by producing products more cheaply or by innovating to meet consumer wants, as noted by Samsung's CEO, who stresses the importance of innovation in business. Similarly, a messenger company might experience lower costs and higher profits if the price of gasoline decreases, allowing it to expand its service area and supply.