Explaining the Cost Leadership Strategy and Its Applications

With many new entrants in all the industries, almost on a daily basis, the rivalry continues to intensify in the business environment. Business survival, sustainability, and profitability are largely dependent on its ability to attain a competitive edge. As such, organizations are tasked to devise effective and practical strategies to help them stand out.

This article speaks about one of the ways through which you can stand out and beat your competitors – the cost leadership strategy. Here, you will learn what cost leadership strategy is, how it is applied, and who needs it, as well as practical tips for attaining success through it.

cost leadership strategy

What Is Cost Leadership Strategy?

Cost leadership strategy is among the four business-level generic strategies. This strategy means engaging in activities capable of delivering a sustainable cost advantage over the rivals. It means ensuring the production and distribution of standardized products, generic products acceptable to many customers, and most importantly, offered at the lowest price.

Efforts are usually channeled towards lowering costs compared to the competition. The primary objective is to become a cost leader. The right cost leadership strategy has the potential to help a business remain profitable amidst new entrants, intensified rivalry, and availability of substitute products, suppliers’ power, and buyers’ power. Among the things that a firm can do include; building a hard to imitate (because of the cost) state of the art efficient facility, tightening the controls on production costs and overheads, and minimizing costs of research and development, sales, as well as service.

Who Uses Cost Leadership Strategy?

Companies that operate in industries where competition is primarily based on price find cost leadership strategy extremely useful. Their profitability allows them to become innovative, sustainable, and also maneuver compared to their competitors who have lower profit margins. A firm should consider using cost leadership strategy when trying to attract a wide client base.

In many instances, a cost leader attracts a huge market share since a large proportion of consumers prefer paying low prices for products as long as they are appealing, and of an acceptable quality. Cost leadership strategy goes beyond offering goods at a lower rate than the competitors to include the ability to produce top-notch quality products. Profit margins per item sold by the cost leaders are usually slimmer than the one enjoyed by their competition. However, since they can attract a huge number of customers, their total profit margin is substantially higher.

Ways In Which Cost Leadership Strategy Can Help Your Business Grow

Walmart, the largest company in the world, is a perfect example of how effective cost leadership strategy can be if applied correctly. Its advertising slogans such as “Save Money. Live better” and “Always Low Prices” are clear indicators of how focused the company is in reducing the prices of the commodities offered to its customers.

Cost leadership strategy permits a firm to produce large volumes of standardized commodities. In turn, the company gains a competitive advantage over its competitors in the industry. The cost of production reduces significantly when goods are produced in bulk. This goes a long way in making it possible for a firm to offer its products at considerably lower prices than other organizations.

With low price offerings, it is not difficult to capture the attention of many customers which raises sales and profitability to great heights. The cost leadership strategy rides on the benefits provided by efficiency. Bulk production not only promotes economies of scale, but it also influences the experience curve. Theoretically, the experience curve limits the ability of new entrants to challenge firms that have a healthy market share. Cost leadership strategy, therefore, protects a business from both the existing and new competitors.

6 Tips For Effective Application of the Cost Leadership Strategy

They include:

  1. The beauty of cost leadership strategy lies in being able to benefit from economies of scale. Production of commodities in bulk promotes efficiency, making production costs significantly lower with an increase in output. While this approach is most prevalent in the manufacturing industries, it is applicable anywhere as long as scale promotes both efficiency and cost reduction.
  2. Existing or prospective cost leaders should learn to take advantage of technology to gain competitive advantage. Consider coming up with a technological innovation under the protection of patents and trade secrets. A unique proprietary process or technology will quickly make you a cost leader in your industry.
  3. Concentrate on increasing the size of your company as it gives you a higher purchasing power. Increased leverage over a supplier gives you the advantage of being able to negotiate unimaginably special deals.
  4. Cost leadership can be attained if a company has privileged access to pertinent raw materials. Think of a company that has rights to a resource such as natural resources or data, yet competitors are paying more for the same. What would prevent such a business from becoming a cost leader? If you can pursue this route, it is worthwhile.
  5. Some of the most famous cost leaders in the world emphasize the importance of operating efficiency. They achieve many things with little money, and in less time. For this to happen, an organization must invest in managers who have invaluable experience and expertise.
  6. Tight systems of controls must be put in place. A request for detailed control reports more regularly while ensuring close supervision of raw materials, inventory, labor, distribution and other costs.

Wrapping It Up

As long as it is approached properly, cost leadership is a highly effective business-level generic strategy. It allows a firm to stay ahead of its competitors by attracting a huge client base through the provision of low-priced, yet quality products.

Business profitability is guaranteed if a company can implement cost controls, operate efficiently, take advantage of economies of scale, and if possible, find a way to obtain unique deals from suppliers. Although it works best in a massive commoditized market, you can try with your business to tactfully pursue cost leadership strategy. It will help your company gain a competitive edge over its rivals in terms of client base, and still, benefit from increased profitability, and consequently, growth.

Image taken from pixabay.com.

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