cost leadership strategy

Prof.(Dr.) Nitin Zaware 1

Cost Leadership Strategy / Low-cost Business Strategy

Prof. (Dr.) Nitin Zaware


Cost Leadership / Low-Cost Business Strategy:

The concept of generic strategies for gaining competitive advantage has received considerable attention recently in the business policy field. Competitive Strategy, a modern classic of business thinking, provides a strong conceptual foundation for developing corporate strategy.

Generic competitive strategies are the marketing strategy any of three strategies for marketing products or services: cost leadership, differentiation, and focus.

The cost leadership strategy implies supplying products in a more cost-effective way than competitors do.


Cost Leadership / Low-cost Business Strategy:

A cost leadership strategy is an integrated set of

actions designed to produce or deliver goods or

services at the lowest cost, relative to that of

competitors, with features that are acceptable to

customers. Achieving Cost Leadership :

Demand Forecasting Economies

of Scale Standardizati

on Aiming at Average

Customer

Use of Cost Saving

Technologies

Differentiation

Withholding


Achieving Cost Leadership :1) Demand Forecasting :

Accurate demand forecasting and high capacity utilization is

to be done to realize cost advantages.

2) Economies of Scale :

Economies of scale are to be attained. They lead to lower

per unit cost of product or service.

3) Standardization :

High level of standardization of products is needed. Uniform

service packages can be offered. Mass production

techniques are to be used. All this yields lower per unit

costs.


Achieving Cost Leadership : 4) Aiming at Average Customer :

Aiming at the average customer makes it possible to offer a

generalized set of utilities in a product /service to cover a

greater number of customers.

5) Use of Cost Saving Technologies :

Investments in cost-saving technologies can help a firm to

squeeze every extra paisa out of the cost, making the

product /service competitive in the market.

6) Differentiation Withholding :

Withholding differentiation till it becomes absolutely necessary

is another way to realize cost-based competitiveness.


Benefits of Cost Leadership Strategy:

Cost Advantage

Capacity to Absorb Increased Price

Price Reduction

Minimizes Threat

Effective Entry Barrier


Benefits of Cost Leadership Strategy:1) Cost Advantage :

A firm is protected against the ill effects of competition if it has a

lower-cost structure for its products and services.

2) Capacity to Absorb Increased Price :

Powerful suppliers possess a higher bargaining power to

negotiate price increase for inputs.

3) Price Reduction :

Powerful buyers possess a higher bargaining power to effect

price reduction.


Benefits of Cost Leadership Strategy:4) Minimizes Threat :

The threat of cheaper substitutes can be offset to some extent by

lowering prices.

5) Effective Entry Barrier :

Cost advantage acts as an effective entry barrier for potential

entrants who cannot offer the product / service at a lower price.


Limitation of Cost Leadership / Low-cost Business Strategy:

Possibility of Duplication of Cost Reduction Technique

Dilution of Customer Focus

Reduction in Scope of Product / Service

Great Threat of Technological Shifts



1) Possibility of Duplication of Cost Reduction Technique :

The duplication of cost reduction techniques makes the position

of the cost leader vulnerable from competitive threats.

2) Dilution of Customer Focus :

Cost leadership is obviously not a market - friendly approach.

Severe cost reduction can dilute customer focus and limit

experimentation with product attributes.



3) Reduction in Scope of Product / Service :

Depending on the industry structure, sometimes less efficient

producers may not choose to remain in the market owing to the

competitive dominance of the cost leader.

4) Great Threat of Technological Shifts :

Technological shifts are a great threat to a cost leader as these

may change the ground rules on which an industry operates.