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This depends greatly on the market that you're in. Depeinding on what you're selling, there are very easy ways to seperate yourself from the rest of the pack, despite having an identical product. In food, for example, places like Trader Joe's do excellent business because they market to the health conscious crowd. Now when you get down to it, a bag of tortilla chips is the same no matter where it comes from. Fritos use the same ingredients as the tortilla chips from Trader Joe's, but because of marketing people expect that the product is healthier. Now, this is slightly deceptive, but this is also business. You are responsible for the incomes of a lot of people in your company, and trying to play the hero by not allowing your marketing division to do their jobs will hurt those people.
If I were in the hypothetical business situation layed out, I would do a number of things. First, I ALWAYS have a plan B, C, D, and E. Putting all your eggs in one basket in business should be a lasy resort, as it's massively risky. I would fall back on plan B, which was a lot less profitable than plan A in the beginning, but is safer now. Say when I start a business I have plans to sell widgits, bleebles, and shnozles. Because widgits provide the best effiency of cost to profit, I sell widgits in the beginning. Now that someone else is selling widgits cheaper, I move back to bleebles. I recoup cost with bleebles in order to reestablish the widgit business (market research, product development, etc.).
I would only cut employee costs as an absolute last resort.
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