Cost leadership strategy

Cost leadership strategy
See also
Low cost strategy Cost advantage Vertical integration Economies of scale Lateral integration Production concept Capital intensive business Bargaining power of suppliers Export incentives

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.

Examples of Cost leadership strategy

• Wal-Mart: Wal-Mart is a classic example of a cost leadership strategy. The company has been able to achieve a cost advantage over its competitors by developing an efficient supply chain, leveraging its economies of scale, and minimizing its overhead costs. Wal-Mart is also known for its everyday low prices, which draw in customers who are looking for value for money.
• Amazon: Amazon is another great example of a cost leadership strategy. The company has been able to achieve a cost advantage over its competitors by developing a highly efficient logistics and delivery system, leveraging its economies of scale, and minimizing its overhead costs. Amazon also offers low prices, free shipping, and a wide selection of products, which attract customers who are looking for good value.
• Southwest Airlines: Southwest Airlines is another great example of a cost leadership strategy. The company has been able to achieve a cost advantage over its competitors by optimizing its routes, leveraging its economies of scale, and minimizing its overhead costs. Southwest also offers low fares and an efficient, no-frills service, which draw in customers who are looking for value for money.

Other approaches related to Cost leadership strategy

Cost Leadership strategy involves achieving a cost advantage relative to competitors and attract clients by lower prices of the product. Some other approaches related to this strategy include:

• Maximizing economies of scale: By producing large quantities of one product, firms can reduce their overall costs and pass on the savings to the customers.
• Utilizing technology: By using technology to automate processes, firms can reduce their labor costs, increase efficiency, and lower their overall costs.
• Outsourcing: By outsourcing lower-value activities, firms can focus on core activities and reduce their costs.
• Leveraging supply chain: Through efficient supply chain management, firms can reduce their supply costs and pass on the savings to customers.
• Cutting costs: By reducing energy consumption, waste, and unnecessary expenses, firms can reduce their costs and pass on the savings to customers.

In summary, Cost Leadership strategy involves achieving a cost advantage relative to competitors and attract clients by lower prices of the product. Other approaches related to this strategy include maximizing economies of scale, utilizing technology, outsourcing, leveraging supply chain, and cutting costs.

References

• Amit, R. (1986). Cost leadership strategy and experience curves. Strategic Management Journal, 7(3), 281-292.
• Reitsperger, W. D., Daniel, S. J., Tallman, S. B., & Chismar, W. G. (1993). Product quality and cost leadership: compatible strategies?. MIR: Management International Review, 7-21.