The low-cost player doesn’t necessarily charge the lowest prices
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The low-cost player doesn’t necessarily charge the lowest prices. Low-cost players have the option of underpricing competitors, but can also reinvest the margin differential in ways that create competitive advantage. Mars is a great example of this approach. Since the 1980s, it has held a distinct cost advantage over Hershey’s in candy bars. Mars has chosen to structure its range of candy bars such that they can be produced on a single super-high-speed production line. The company also utilizes less-expensive ingredients (by and large). Both of these choices greatly reduce product cost. Hershey’s and other competitors have multiple methods of production and more-expensive ingredients and hence higher cost structures. Rather than selling its bars at a lower price (which is nearly impossible because of the dynamics of the convenience-store trade), Mars has chosen to buy the best shelf space in the candy bar rack in every convenience store in America. Hershey’s can’t effectively counter the Mars initiative; it simply doesn’t have the extra money to spend. On the strength of this investment, Mars moved from a small player to goliath Hershey’s main rival, competing for overall market share leadership.
… You don’t get to be a cost leader by producing your product or service exactly as your competitors do, and you don’t get to be a differentiator by trying to produce a product or service identical to your competitors’.
… Many companies like to describe themselves as winning through operational effectiveness or customer intimacy. These sound like good ideas, but if they don’t translate into a genuinely lower cost structure or higher prices from customers, they aren’t really strategies worth having.
— Via Playing to Win: How Strategy Really Works. The kindle edition is only $7.99!