What Is Cost Leadership?

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The manufacturers focus on cost leadership by redesigning their production or operation process since it creates a strong base for developing the strategy. For example, specific business process digitization or automation exhibits entities redesigning their work in line with the latest technological advancements and reducing costs significantly.

Key Takeaways

  • Cost leadership is achieving the lowest cost of manufacturing while maintaining the highest standards of quality to become the most inexpensive manufacturer in the sector.Companies embracing it use various techniques to reduce manufacturing costs and provide high-quality goods at competitive pricing.The primary goal of cost leadership is price war competition, made possible by mass production, allowing firms to achieve economies of scale by innovating products better and at a lower cost than competitors.The cost focus and differentiation strategies are different from it because the cost focus strategy is about offering low prices to a specific segment of customers, and cost differentiation involves producing unique products to become market leaders.

Cost Leadership Strategy Explained

Cost leadership is the strategy to secure a competitive advantage by lowering the price of the products. Following cost leadership makes participation in the price war competition easier for the firms. It is easier for large companies to adopt this strategy than for small ones. Large companies can easily increase production scale, attain economies of scale, and access technologies required to increase production efficiency.

In addition to attaining economies of scale and utilizing technological advancements, various other things contribute to the cost leadership strategy. It includes easy access to raw materials, elevating operational efficiency, and focusing on fewer products.

Examples

Let us look at cost leadership examples to understand the concept better:

Example #1

Walmart, an American giant multinational retail corporation, uses cost leadership techniques to produce goods and services. The business operations of Walmart have become so efficient through the help of automated technology and innovation, relations with the leading suppliers, and low outsourcing costs. As a result, they can set “Every Day Low Price (EDLP)” for goods and services and sell them at competitive prices in the market, which helps generate huge profits.

Example #2

The Scandinavian multinational IKEA designs and markets ready-to-assemble furniture, kitchen appliances, decor, home accessories, and other products and services.

They follow a cost leadership strategy. For instance, IKEA looks for suppliers who can produce well-designed subassemblies at the lowest prices, and customers are the ones who assemble the products themselves instead of the manufacturer. Both producers and consumers could reduce transportation costs by using this technique.

This technique reduces the cost incurred by the manufacturer and the price offered to the customers without compromising quality. It allows manufacturers to reduce costs and set attractive prices, contributing to attracting new customers, increasing customer base, and customer retention.

Example #3

The success of the international online retailer, which has a very slim profit margin, is a result of economies of scale, innovation in numerous business processes, and ongoing company diversification. The vast array of warehouses and processing capacity explains its achievement of physical economies of scale.

Advantages And Disadvantages

The advantages of cost leadership are as follows:

  • The focus on producing the goods at low-cost decreases the overall production cost, leading to higher profit margins.The price war competition between the competitors leads to a reduction in production cost. Hence, it is beneficial for the consumers to buy the products at a low price.The market share of the companies focusing on delivering low-cost but quality items increases with the rise in demand for their products compared to the competitors.

The disadvantages are as follows:

  • The presence of cost leaders in the market disrupts the entry of new competitors and thus declines competition.Reducing cost and maintaining quality at the same time is a difficult process.Maintaining large-scale production and effective method of cost reduction is challenging when there is an incessant change in trends and technological advancements.

Cost Leadership vs Differentiation vs Cost Focus

  • Essence: Cost leadership is about achieving the lowest cost of production and offering low prices and good quality products. In contrast, the cost-focus strategy is about offering low prices to a specific segment of customers, and differentiation involves producing unique products to become market leaders even at higher prices.Plan: The cost leadership focal point is the exploitation of the scale of production and improvement in the production process to reduce cost rather than compromising quality to reduce cost. In contrast, differentiation focuses on constant research and development and recent trends to create unique products that are different in features from competitors’ products. In addition, the cost-focus strategy gives importance to selecting the niche market segment.

This has been a guide to what is Cost Leadership. We explain its examples, advantages, disadvantages, and comparison with differentiation and cost focus. You can learn more about financing from the following articles –

The strategy aims to reduce costs without affecting the quality. It depends on achieving economies of scale, increasing operational efficiency, easy access to raw materials, and focusing on fewer products or niches.

The cost leadership strategy creates a competitive advantage by selling quality products at the lowest price possible, given the competitors cannot sell their products at similar quality and price in the long run. In order to maintain the competitive advantage, it is important for the cost leaders to incessantly keep the production cost low by utilizing technological advancements.

This strategy entails creating inexpensive quality goods with distinctive features. The goal of this approach is to simultaneously highlight low cost and distinctiveness as sources of competitive advantage. It is also an example of a hybrid strategy.

  • Price LeadershipCost OverrunCompetitive Advantage