Cost leadership strategy

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Cost leadership strategy involves achieving a cost advantage relative to competitors and attract clients by lower prices of the product, without reducing the quality of the product; This strategy blossomed in the 1970s, thanks to the wide use of experience curve concept.

Companies that can afford to produce at the lowest cost are those that achieve the benefits of the experience effect (the total unit cost decreases by fixed percentage each time when the volume of production doubles). Effect of experience is often called experience curve. The reasons for the emergence of the effects of experience are economies of scale, effect of the practice, increase of skills and the substitutability of capital and labor.

Conditions of low cost leadership strategy

The conditions to which company must comply using cost leadership strategy:

  • Must be well managed to afford to reduce costs with an increase in the volume of production,
  • Must have sufficiently high or dominant market share.

The advantages of cost leadership strategy

  • Brings higher than average profits despite the presence of strong competitive forces,
  • Shows that the company will make a profit even if the competitors lost profitability as a result of competition,
  • Protects the business from suppliers, as it provides greater flexibility during increases in the prices of raw materials and components,
  • Creates favorable conditions for competition with companies producing substitutes.

Disadvantages of low cost leadership strategy

  • Technology changes in a given industry may be so quick that the company is not able to financially cope with ever new purchases of equipment,
  • Company focused on lowering costs might not see the need to make the necessary changes in the field of marketing.

References