Strategic Management - Cost Leadership (2024)

FAQs

Strategic Management - Cost Leadership? ›

Summary. Cost Leadership is a strategy to reduce the cost of operation and produce the lowest priced products or services, to outdo the closest competitors and gain market share.

A cost leadership strategy hinges on a company's ability to lower costs of production to offer quality products at low prices. It's an effective strategy for large companies with lots of buying power, but it's less effective for small businesses.

Cost leadership is a business-level strategy for businesses that want to compete based on price. The cost leadership strategy is about minimizing the cost of providing products/ services to be an industry leader in low-cost production.

The major components of cost leadership include achieving economies of scale, reducing costs through modular production, and squeezing profit margins of suppliers. The major components of cost leadership are market segmentation, differentiation, and a broad scope.

Cost leaders tend to keep their costs low by minimizing advertising, market research, and research and development, but this approach can prove to be expensive in the long run. A relative lack of market research can lead cost leaders to be less skilled than other firms at detecting important environmental changes.

A firm following a cost leadership strategy offers products or services with acceptable quality and features to a broad set of customers at a low price (Table 6.2). Super Shoes, for example, sells name-brand shoes at inexpensive prices. Little Debbie snack cakes offer another example.

Strategic cost management (SCM) deals with measuring and managing costs and aligning them to the business strategy. The cost and management accounting information thus developed would help managers to understand and implement the strategy, diagnosis the performance and influence behavior and decisions.

The cost leadership strategy involves a business method focusing on gaining a competitive edge by reducing costs across the organization. It is not just a single tactic but a framework that applies to every aspect of operations.

Firms engaging in cost-leadership strategy seek to combine low per-unit profit with large sales to make a profit. Typically, but not always, they tend to market to a large population base or a niche with a high demand volume.

Cost leadership strategy is most effective when the organization has access to several sellers. Having several sellers available gives the organization the option to purchase materials and manipulate their costs. Product differentiation does not impact cost leadership.

What is a major pitfall of the cost leadership strategy? ›

In some settings, the need for high sales volume is a critical disadvantage of a cost leadership strategy. Highly fragmented markets and markets that involve a lot of brand loyalty may not offer much of an opportunity to attract a large segment of customers.

Amazon.com, for example, can charge low prices in part because it does not have to absorb the overhead involved in operating stores. Similarly, some talented chefs are pursuing a best cost strategy by operating food trucks and thereby avoiding the overhead required to run a restaurant such as rent and utilities.

A Niche Cost Leader Strategy concentrates primarily on the Traditional and Low End segments of the market. The company will gain a competitive advantage by keeping R&D, production and material costs to a minimum, enabling the company to compete on the basis of price, which will be below average.

Focused cost leaders such as Checkers Drive In do not charge high prices like REI and Nat Nast do, but their low-cost structures enable them to enjoy healthy profit margins. A second advantage of using a focus strategy is that firms often develop tremendous expertise about the goods and services that they offer.

Cost Leadership. Strategy that generates economic value by providing products—goods or services—with features acceptable to customers at lower costs than competitors. (Not necessarily lower prices but definitely lower costs.)

Cost leadership→ A firm pursuing a cost-leadership strategy attempts to gain a competitive advantage primarily by reducing its economic costs below its competitors. oThis strategy calls for being the low cost producer in an industry for a given level of quality.