What is a cost leadership strategy? How can cost leadership be achieved? with examples

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A cost leadership strategy is a method of reducing costs and producing the least expensive goods in a market or industry in an effort to gain market share.

The modern business environment is very complex and evolving as consumers are aware of the choices available to them. One of the ways companies differentiate themselves is through competitive pricing. Companies with the lowest production costs are able to offer the same level of product quality as their competitors at a much lower price.

Consumers are constantly looking to increase their purchasing power, and if this cannot be achieved through increased income, then buying more for less is the next best alternative.

Companies striving to be cost leaders are taking this opportunity to provide ordinary consumers with great products at great prices.

What is the cost leadership strategy?

Cost leadership strategy is the mechanism of creating a competitive advantage by obtaining the lowest operating cost in the industry. This strategy is especially useful in a market where price is an important factor.

The primary goal of a company aiming to achieve cost leadership is to become the lowest cost producer as compared to competitors. This is usually achieved through large-scale production which enables the company to achieve economies of scale or through innovation The production process.

Obtaining high quality raw materials at the lowest price is the primary goal when working on applying the cost leadership strategy. Moreover, there are additional requirements for high-quality labor that will transform these raw materials into valuable commodities for the consumer.

but,

It should be noted that the way the cost of products differs from their price, similarly, cost leadership is not the same as price leadership.

The expense incurred by the firm in the process of bringing a product or service to the market is known as cost; While the money that customers pay for that product or service is known as its price. The price value is usually higher than the cost value.

Thus, cost is the money given by the firm to produce and bring a product to market (such as labor, capital, materials, wages, bills, and other transaction costs). Whereas price is the money the company gets from that product (total production costs and seller profits).

Benefits of being a cost leader

There are many benefits to being a cost leader. Cost leaders can charge the lowest amount for a product while still being profitable. Other companies may have to sell their products at a loss to compete with cost leader prices.

Cost leaders can also weather downturns better than competitors because they are experienced in attracting consumers with budgets in mind. A company with very low operating costs can go on for a longer period of time without hitting targets the sales Compared to a company with higher costs.

Also, cost leaders can be more flexible. Because their costs are low, they can often discount prices or perhaps try out other product offerings that other companies may not be able to do. Companies that are flexible are likely to attract a larger customer base.

While there are many benefits to being a cost leader, you should also note that choosing a cost leadership strategy can be risky. As opposed to offering superior products or brand appeal, a cost leadership company’s greatest value to consumers tends to be low prices.

Therefore, if a competitor can cut costs further, it will pose a significant threat to the company’s customer base.

The difference between cost leadership and price leadership

Although the two often go together, cost leadership is not necessarily price leadership. A firm can be the lowest cost producer but not provide the lowest priced products or services and thus possess higher profitability. A cost leader will be more profitable than a competitor at the same price point.

Cost leaders’ profitability gives them room to innovate, maneuver, and survive relative to their lower-margin competitors, especially in price-focused industries.

The goal of a cost leader is to reduce costs, not just prices. Also, the lowest-priced company is not necessarily the lowest-cost company.

Now that we have a good knowledge of cost leadership, let’s move on to achieving it in real life.

How to achieve cost leadership

Although a bit challenging, achieving cost leadership is not difficult.

A unique and effective cost leadership strategy that is better than competitors is key!

Cost leadership strategy works on the basic principle that the more units produced, the lower the unit cost will be. It exploits the scale of production, by producing products with high standards using advanced technology.

In short, a successful cost leadership strategy enables companies to sell more units sold at a lower margin per unit.

However, there are no short cuts aimed at achieving cost leadership in the long term. Either they commit to cost cutting or they lose the race.

Here are some of the cost leadership strategies by which one can establish and maintain supreme authority in the industry:

economies of scale: Efficient production reduces production costs. Company size matters a lot when we talk about economies of scale. In short, the bigger the business, the lower the costs.

Size advantages: Increased purchasing power is a major consequence of scale advantages. In short, the more money given to suppliers, the greater the likelihood of extracting unique deals that become advantages.

technology: Better and innovative production techniques and methods are a major deal in reducing costs. In short, the better technology used by a company, the greater its chances of maintaining its cost leadership in the long run.

the focus: A company does not need to be huge in order to be a cost leader in the market. Even if a company can only produce one product, but with full focus and efficiency, it can become the cost leader in this market area. In short, the more focus a company puts into its interest, the greater its chances of becoming the cost leader in this area.

Raw materials: Costs can be significantly reduced depending on how much access the company has to the basic raw materials required for production. One company may pay huge amounts of money for a particular resource, while another may not have to do so. In short, the greater the company’s access to potential raw materials, the greater its chances of reducing costs compared to competitors.

Operating efficiency: Getting more done in relatively less time and costs is emerging as a golden way to increase efficiency as well as reduce costs. In short, the less money and time a company spends to get the job done, the more chances it has of emerging as a cost-effective and differentiated company.

These were some of the ways companies can cut costs and improve their chances of becoming the cost leader in the market.

Now, let’s take a look at some of the successful cost leaders in today’s market.

Cost leadership strategy examples

Amazon
Amazon offers maximum value to its customers at the lowest price and wraps its business around customers as they find it a reliable gateway to their online shopping needs.

McDonald’s
McDonald’s practices division of labor by hiring and training inexperienced employees rather than skilled chefs, and thus has been able to cut huge sums of costs from the salaries of its employees.

How to become a cost leader

Most cost leaders rely on a variety of these methods at the same time to keep their operating costs extremely low and maintain their cost leadership position. Ways to become a cost leader include:

  • Increase production volume
  • Application of advanced technology
  • sources of raw materials
  • improve efficiency
  • Limitation of products and services

common questions

What is a cost leadership strategy?

Cost leadership occurs when the company is the leader in the lower price segment. To do this successfully without cutting revenue drastically, the company must reduce costs in all other areas of the business, such as marketing, distribution, and packaging. A cost leadership strategy is a company’s plan to become the cost leader in its class or market.

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