Some competitors are using growth to reduce their costs

Symptom: Some competitors are using growth as a method of cost reduction.

Implications for the market:

  • Some managers believe that the different cost structures among their competitors stem from their differential rates of costs or approaches to the basic functions. But, while competitive advantages on rates or approaches are important short term, they can be copied and therefore are not the primary source of superior long-term profitability.

  • Productivity is usually the best way to gain a sustainable cost advantage in a hostile environment. This productivity can be achieved through tight focus on serving selected customers, on greater absolute volume, or on faster growth.

  • The fastest growing competitors will often enjoy higher-than-average profitability. When a competitor's growth significantly outpaces that of the market, the competitor tends not to add costs as fast as it increases output. Costs are constantly racing to catch up to output. While growth is high, returns are high as well.

  • These competitors can use their superior profitability to attract new customers. Few high-profit companies are content to remain with their base customers. Rather, most use their high profits to invest in new products and services in order to attract new volume–volume previously served by other competitors in the market.

Recommended Reading
For a greater overall perspective on this subject, we recommend the following related items:


Perspectives: Conclusions we have reached as a result of our long-term study and observations.

  • "Achieving The Low Cost Position"
    Most people think primarily of physical costs. However, a second, less understood type of cost is more important and holds the key to achieving the true low cost position

  • "Costs: The Last Consideration"
    As margins fall and profitability slides, the obvious first response is to cut cost. Knowing why that may be the wrong choice requires an understanding of the difference between effective cost control in hostile and non-hostile markets.

  • "Is Bigger Really Better?"
    In the average large industry, the market share leader is only slightly more likely to lead the industry than is any one of the next three competitors in the industry. Market share leaders often fail to become return leaders because they serve some customers who yield low returns and rely on size alone to create economies of scale.

  • "Use Subtle Strategy in Tough Markets"
    A hostile market operates differently than a market with "normal" competitive conditions. But as difficult as a tough market can be, it can also present an astute management team with an unusual opportunity.