What Is Cost Leadership Strategy? | Indeed.com

Offering products at the lowest cost available is a strategy businesses often use to stimulate growth. A company is more competitive when it ... 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CareerGuideCoronavirusJobResourcesFindingaJobMoreCoronavirusJobResourcesFindingaJobResumes&CoverLettersInterviewingStartingaNewJobMoreCareerGuideCareerDevelopmentWhatIsCostLeadershipStrategy?WhatIsCostLeadershipStrategy?ByIndeedEditorialTeamSeptember3,2021TwitterLinkedInFacebookEmailCopytoClipboardOfferingproductsatthelowestcostavailableisastrategybusinessesoftenusetostimulategrowth.Acompanyismorecompetitivewhenitcanofferitsproductsatalowerprice.Todothis,anorganizationneedstodevelopacostleadershipstrategy.Inthisarticle,wewilldiscusswhatcostleadershipisandhowtodevelopaneffectivestrategy.ShowTranscriptWhatisacostleadershipstrategy?Costleadershipoccurswhenacompanyisthecategoryleaderforlowpricing.Tosuccessfullyachievethiswithoutdrasticallycuttingrevenue,abusinessmustreducecostsinallotherareasofthebusiness,suchasmarketing,distributionandpackaging. Acostleadershipstrategyisacompany’splantobecomeacostleaderinitscategoryormarket. BenefitsofbeingacostleaderTherearemanybenefitstobeingacostleader.Costleaderscanchargethelowestamountforaproductwhileremainingprofitable.Othercompaniesmayhavetoselltheirproductsatalosstocompetewithacostleader’sprices.Costleaderscanalsowithstandrecessionsbetterthancompetitorsbecausetheyareexperiencedinappealingtoconsumerswithbudgetsinmind.Acompanywithverylowoperationalcostscouldgolongerwithoutachievingsalesgoalsthanacompanywithhighcosts.Also,costleaderscanbemoreflexible.Sincetheircostsarelow,theycandiscountpricesmoreoftenorpotentiallytryoutotherproductofferingsthatothercompaniesmightnotbeableto.Companieswithflexibilityarelikelytoattractalargercustomerbase. Whiletherearemanybenefitstobeingacostleader,itshouldalsobenotedthatchoosingacostleadershipstrategycanberisky.Asopposedtoofferingsuperiorproductsorbrandappeal,acost-leadershipcompany’sgreatestvaluetoconsumerstendstobelowpricing.Therefore,ifacompetitorcanreducecostsmore,itwillposeasubstantialthreattoacompany’sconsumerbase.Related: GuidetoCompanyCulture DifferencebetweencostleadershipandpriceleadershipSometimespeopleusethetermscostleadershipandpriceleadershipinterchangeably,butthesewordsdonotrefertothesameprinciple.Costleadershipmeanshavingthelowestoperationalcostinanindustryandmarket.Priceleadershipmeanshavingthelowestprice.Veryfrequently,acompanythatisacostleaderisalsothepriceleader. Sometimes,aprice-leadingcompanychoosestohavethelowestpricesatallcostsandmaybelessprofitableasaresult.Forexample,largeonlinecompaniessometimessellitemsatalossorasmallprofitmargintomaintainthelowestpricesonsomeofitsproductsandgainalargermarketshare.Thesecompanieswouldbepriceleadersbutnotcostleaders. Othercompaniescouldhaveloweroperationalcostsandchoosetosellproductsforhighermarginstomakemoreofaprofit.Thesecompanieswouldbeconsideredcostleadersbutnotpriceleaders.However,itisverycommonforpriceleadershipandcostleadershiptooverlapinacompanythatmanufacturesforthelowestcostandoffersthelowestcategoryprice.HowtobecomeacostleaderMostcostleadersrelyonavarietyofthesemethodsatthesametimetokeeptheiroperationalcostsextremelylowandmaintaintheircostleadershipstatus.Waystobecomeacostleaderinclude:IncreasingtheproductionscaleImplementingadvancedtechnologySourcingrawmaterialsImprovingefficiencyLimitingproductsandservices1.Increasingproductionscale Scalingabusinesscanhaveasignificantimpactonitsabilitytobecomeacostleader.Scalingoccurswhenacompanyreducescostsbyincreasingthevolumeofmaterials.Forinstance,ifacompanypurchasesalargeamountoffabricinsteadofonlytheamountitrequires,thecompanycanreducethecostofgoodswithalowerper-yardprice.Scalingthebusinesshelpstosecurelargerordersofrawmaterialsandsupplies,whichcanfurtherreducethecostofgoods.Italsogivesacompanymorepoweroversuppliers,sincethecompany’sorderswillmakealargershareofthesupplier’sbusinessoperations.Scalingabusinessalsoinsulatesitagainstthecompetition.Costleadersthatscaletendtohavemorenegotiatingpower,moreflexibilitywithpricingandtheabilitytowithstandcompetitionmoreeffectively.Ifacompanyisinanindustrywithintensecompetition,scalinggivesittheabilitytoofferpricesthatcompetitorscannot.Thatcompanyalsogainstheabilitytoofferinventoryonamuchlargerscale,soitcancaptureabiggersegmentofthemarketwithoutworryingaboutrunningoutofinventory. 2.ImplementingadvancedtechnologyCreatingorinvestingininnovativetechnologycanhelpcompaniesbecomecostleaders.Sometimes,acompanycanlowercostsbycreatingatechnologythatcanmanufacturemoreproductsperhour,limitthenumberofemployeesneededforproductionorprovidesomeotherbenefittotheprocess’sefficiency.Patentingauniquetechnologywillalsoensurethatothercompanies,includingcompetitors,can’tuseitfortheirownbenefit.Acompanycouldalsosellitspatentedtechnologylaterontogeneratemorerevenue. Sometimes,alreadyexistingsoftwareprogramscanbenefitcompaniesbysavingtimeorreducingcosts.Iftheprogramcanreducethenumberofemployeesacompanyneedsintheoperationalprocessorthenumberoferrorsintheproductionprocess,itmightbeworththeinvestment.Ascompaniesgrow,itisonlynaturaltotrytofindwaystostreamlineprocessesalongtheway.3.SourcingrawmaterialsBuyingrawmaterialsforthemanufacturingprocesscanbeexpensivebecausethesupplieralsomarksuptheirpricestomakeaprofit.Ifpossible,sourcingrawmaterialsandreducingtherelianceonthird-partyproductscanloweroperationalcosts. Sourcingmaterialsdirectlyalsogivesacompanytheabilitytosupplyothercompanies.Ifabusiness’srawmaterialsupplygreatlyexceedsitsneeds,itcanresellittoothermanufacturersatamarketpriceasanothersourceofincome. 4.ImprovingefficiencyIncreasedefficiencycanoftentranslateintooperationalcostsavingsforcompanies.Oneexampleofthisistousesoftwaretoreducethenumberofpeoplerequiredtoworkontheprocess,whichwouldreducesalarypayments. However,reducingemployeesisnottheonlywaytoimproveefficiencyandreducecosts.Quickermanufacturingtimesforcustomordersmeansthatacompanymightbeabletochargemoreforspeedyserviceeventhoughacompanydoesn’thavetopayasmuchfortheelectricityandrelatedexpensesformakingaproduct.Betterefficiencycanhelpcompanieswithoutcustomproducts,too.Forinstance,acompanycanmake100clothdiapersanhourinitssewingfactoryperday.Itcosts$3,000adaytoruntheplant,paythestaffmembersandcoverotherexpenses.Ifthecompanyincreasesefficiencythroughtechnology,reorganizingtheprocesstobecomemoreefficient,orbulkcutfabricsinsteadofonepieceatatime,thatcompanymightbeabletomanufacture200clothdiapersadayfor$3,500.Thecompanyimmediatelyreducestheoperationalcostperclothdiapersoldwithverylittleeffort.5.LimitingproductsandservicesOnestrategytobecomeacostleaderisforacompanytolimititsproductsandservices.Byhavingfewerproductstomanufactureandsell,thatcompanycanfocusmoreofitseffortsonafewhighlyprofitableproductsorservices.Thismakesiteasierandmorelikelythatthatcompanywillbeabletoscaleitsoperationsandgetthelowestcostsonrawmaterialsandothersupplies.Related:YourGuidetoVisionaryLeadershipHowtodevelopacostleadershipstrategyDevelopinganeffectivecostleadershipstrategytakessometime,researchandpersistence.Officialsatacompanywilllikelyneedtoupdateitscostleadershipstrategyregularlytoaccountforpriceincreasesinlaborandrawmaterials,changesinthemarketandnewcompetitors.Hereisahow-toguideforcreatingacostleadershipstrategy:Analyzeexistingoperations.Researchcompetitors.Identifystrategiestoreducecosts.Keeptrackofprogress.1.AnalyzeexistingoperationsFirst,assesstheorganization’sexistingoperations.It’simportanttoknowtheexactcostsofeverymaterialthecompanybuysandthelabor,administrationandsoftwarethatgoesintotheproductionofgoodsandservices.Thisshouldincludecoststhatmayhavebeenoverlooked,suchasinvoicingsoftware,grammar-checksubscriptionsandwordprocessingsoftware.Ifthecompanyneedstheexpensetocreateitsproducts,thosecostsshouldbeaccountedforinsalesprices.2.ResearchcompetitorsNext,thoroughlyresearchcompetitors.Companiesshouldfindoutasmuchastheycanaboutotherbusinesses’processesandcostssotheycanidentifycompetitors.Assessingacompetitor’soperationscanhelpacompanyimproveitsowncostsorprocesses,evenifitdoesn’tbecomeacostleader. 3.IdentifystrategiestoreducecostsFinally,identifystrategiesthatcanhelptodrivedowncostsanddevelopactionableplansforimplementingthesestrategiesintothebusiness’soperations.Thismightincludefollowingupwithsuppliers,creatinglargersupplyordersandintroducingnewtechnologyintothebusiness.Forexample,afterpressurefromworkersaboutcompensation,fastfoodrestaurantsbegantoimplementtouchscreenorderingkiosksinselectstores.Thispieceoftechnologyhelpstoreducethenumberofemployeesneededtorunthecashregisterandmakesexistingemployeesavailabletocompleteothertasks,includingcustomerservice.4.KeeptrackofprogressAscompanyleadersimplementcostleadershipstrategies,theymustfindwaystomeasureandmonitorprogress.Costleadershipisaprocess,andmanycompaniesrepeatthesestepswithsomeregularity.RelatedArticles12ExamplesofAcademicSkills(AndHowToImproveThem)WhatIstheAdaptiveProjectFramework?(WithStagesandTips)WhatArethe5M'sofAdvertising?(DefinitionandExamples)