Firms that compete on overall cost leadership are vulnerable if there is an increase in the cost of the inputs on which the advantage is based.

Question

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Firms can be vulnerable to price increases in the factors of production. For example, consider manufacturing firms based in China which rely on low labor costs. Due to demographic factors, the supply of workers 16 to 24 years old has peaked and will drop by a third in the next 12 years, thanks to stringent family-planning policies that have sharply reduced population growth in China. This is leading to upward pressure on labor costs in Chinese factories, undercutting the cost advantage of firms producing there.

Firms That Compete on Overall Cost Leadership Are Vulnerable If