ACCA Strategic Professional · Strategic Business Leader · Strategic choices
Dunmore Telecom is the lowest-cost producer of mobile handsets in its market and currently earns superior margins. Its board plans to use the extra margin to cut prices sharply below rivals to gain share. A rival with a similar cost base but strong brand loyalty is expected to match the price cuts. Which assessment best reflects Porter's view of sustaining cost leadership?
Dunmore should avoid a price war. A cost leader must maintain parity or proximity in differentiation, and a rival with similar costs and loyal customers can match cuts. This would erode Dunmore's margin advantage and industry profitability without delivering a sustainable gain in market share.
- ADunmore should avoid triggering a price war, because cost leadership requires parity or proximity on differentiation, and matching cuts would erode its margin advantage without securing shareCorrect
- BDunmore should cut prices because cost leaders always win price wars regardless of rivals' cost position
- CDunmore should abandon cost leadership because brand loyalty makes cost advantage irrelevant
- DDunmore should differentiate heavily and raise costs, since cost leaders must also be the highest quality producers
Explanation
Porter argues a cost leader must keep differentiation at parity or near parity and should be wary of price wars. The rival's similar costs and loyal customers mean matching cuts would reduce industry profitability and Dunmore's margin without a lasting share gain. Cost leaders do not automatically win price wars.
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