In business strategy, cost leadership strategy is setting a company’s competitive advantage by owning the lowest cost of production in the market to gain market share. Cost leadership is most often driven by organizational size, operational efficiency, scope, cumulative experience, and overall corporate efficiency.
In many cases, the phrase refers to a specific company or department but it can also be used to define an overall company objective such as “become the number one low-cost producer” or “meet the company’s goal of being the most environmentally responsible organization.” This objective is usually at the top of every company’s marketing agenda and includes everything from finding cost-effective ways to acquire materials to finding ways to reduce waste.
What is cost leadership?
Cost Leadership is the mechanism of building competitive advantages through having the lowest cost of operation in the industry. This is an effective cost leadership strategy that has proven particularly useful in a market where price factors make this a critical component.
A company’s cost is the money that it gives for the manufacturing and introduction of a product in the market such as labor capital goods, materials wages bills, and other transaction costs. Companies should aim for the ultimate cost leadership in order to achieve low-cost production as they tend to be in competition. These are usually achieved with large-scale production which enables the firm to achieve economies of scale or innovating production processes.
What is an example of a cost leadership strategy?
There are many businesses that succeed on the back of their cost leadership strategies. Examples include Walmart and McDonald’s. These two businesses offer a competitively priced product at an affordable price. This in turn is attractive to consumers looking for value in uncertain times.
Cost Leadership Price Leadership
A company could be the lowest cost producer but not offer the lowest priced goods and services thus having a higher profits margin. A cost leader may produce more profits per year than another competitor at the same price.
Cost leader profitability gives leaders more room to innovate, maneuver and survive compared to lower margin opponents. Cost Leading Company’s mission is to lower cost – not just pricing.
A company with a lower price may not have the lowest cost as it could in fact be the company with the highest costs.
How Does Walmart Use Cost Leadership Strategy?
Walmart is a famous cost leader that understands the importance of providing low-cost items to its customers. In order for them to do this, they work closely with suppliers who produce full lines of products that are seen in Walmart stores everywhere.
How do you use a cost leadership strategy?
The way to increase profits by cutting costs while maintaining industry-average prices is simple.
By lowering prices, the company can increase its market share and still have a reasonable profit per sale.
Why is cost leadership strategy important?
A business should strive to provide better profits for the team and organization by using a cost leadership strategy. By focusing on producing low-cost businesses within an industry, you’ll be able to produce higher profit margins by reducing the development costs of new products or services.
Increases Market Size
Cost Leadership strategy is a proven method for gaining profit by offering lower prices, but it also means your company will continue to grow in size. Indian consumers are the same as they’ve always been and prefer products with less price that have excellent quality. The example of Xiaomi leads across the globe now because their business model has helped them produce high-quality cell phones at affordable costs – just what people want from a good phone!
Increases Business Sustainability
When a company is able to produce at low costs, they are more resistant to the effects of market collapse. Even if one product’s demand falls drastically, there won’t be any significant losses since it will cost less for production. This way Cost Leadership strategy becomes an advantage and helps companies stay afloat in this fluctuating marketplace longer than before.
Increases Profit Margin
The truth is, many companies have found that the Cost Leadership method can not only increase profitability but also generate greater recognition and popularity. This might make it seem like a perfect solution for any company looking to boost sales while simultaneously saving money on production costs.
The Cost Leadership strategy is a great way for companies to establish an advantage in the market. The new entrants into this industry will have difficulty gaining traction when faced with competition from established players who use Cost Leadership as their competitive edge. For those that are already entrenched, they can coast on their success and profit while deterring any challengers which makes it difficult if not impossible for newcomers to disrupt them.
Advantage of being a cost leader
Cost leaders can charge the lowest amount for a product while remaining profitable. Other manufacturers could have to sell products at a loss to beat cost leaders’ prices. A company with lower operational costs could stay profitable more than a company with more complex expenses. Companies with flexibility tend to attract more customers.
A cost-leadership company’s most valuable benefit to consumers usually is low prices. Therefore if a competitor reduces costs in a better manner it will create a serious threat to a company’s consumers.
Note that choosing a cost leader strategy may be risky. Therefore, successful cost leaders should keep the company in contact with its customers.
How Can You Achieve Cost Leadership?
A strategy- The firm exploits the production scale allowing it to produce highly standardized products using high-tech products. Successful cost leadership strategies enable organizations to sell more units sold at a lower margin per unit.
However, there are no shortcuts if a company is aiming to achieve a long-term cost advantage. A cost leader has to agree to cost-cutting. Companies can reduce costs and increase the chance of cost leader status by identifying opportunities to lower prices.
Choosing the right generic strategy
Cost Management requires a deep internal focus on processes. while differentiation requires an outward, creative approach. Use the SWOT analysis(strength, weakness, opportunity, threats) for the generic strategy. This strategy will help you analyze any possible outcome for your adopted strategy.
How do I develop a cost leadership strategy?
It is likely companies would have to adjust their cost management strategy periodically to account for price increases in labor and production costs, changes in supply, production process, and new customers.
You should be confident that you will conquer and maintain the number one position in the industry before you choose to go the Cost Leadership way. Companies that continue to be successful in achieving Cost Leadership usually have very efficient logistics, have access to capital, and have a sustainable way of cutting costs to have the lowest priced products in the market.
Conclusion
To survive in any business you need a business strategy. A cost leadership strategy is a great business approach that is very competitive but will help you in gaining market share. You could also become the most famous cost leader in the industry if you employ the right strategy.
