Which of the following is a risk (or potential pitfall) of pursuing cost leadership in a competitive market?

• A. Competitors may imitate cost-saving strategies, eroding the firm's advantage.
• B. Cost leadership always leads to higher prices for consumers.
• C. Firms pursuing cost leadership are less likely to achieve economies of scale.
• D. The firm may become too focused on product differentiation.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of cost leadership. Cost leadership is a strategy where a firm aims to become the lowest-cost producer in its industry, allowing it to offer lower prices or achieve higher margins than competitors.
2. Step 2: Identify the potential risks or pitfalls associated with cost leadership. One common risk is that competitors may observe and imitate the cost-saving methods, which reduces the original firm's competitive advantage.
3. Step 3: Evaluate the incorrect options by understanding their relation to cost leadership: higher prices for consumers contradict cost leadership's goal; economies of scale are often a benefit, not a drawback; and focusing too much on product differentiation is more related to a differentiation strategy, not cost leadership.
4. Step 4: Conclude that the main risk of pursuing cost leadership is the possibility of competitors copying cost-saving strategies, which erodes the firm's advantage over time.
5. Step 5: Summarize that while cost leadership can provide competitive advantages, firms must continuously innovate and improve efficiency to maintain their position against imitators.