Cost leadership strategy
Category: Marketing
The A company has chosen the following two strategies:
To obtain cost dominance, i.e. the company which has the lowest production costs in the trade.
The cost dominance is realised in the entire market width, i.e. highest amount of market segments.
The company has chosen the price as its action parameter. It is a sound standard product/service cleared of unnecessary costly functions and characteristics and satisfies basic needs and gives the customer a high utility value for his money compared to the other offers within the business. A broad segment of the customers are potential buyers.
All resources, energy and creativity of the company are steered towards reduction of costs which is its primary competence. Key disciplines are deciding, control and exploitation of large-scale production. Companies continuously seek areas which can be exploited for cost reductions and following become competition advantages and they continuously initiate projects to enlarge the efficiency.
This strategy covers several consequences. The broad access to the market opens for large-scale possibilities and results in cost reductions. Additionally, passing the learning curve would be a source to obtain competition advantages in terms of lower costs. However, neither the large-scale advantages nor the exploitation of the learning curve would be sufficient for a company seeking cost dominance.
Depending on the structure of the particular business, there are several sources to cost advantages as described in Porters 5 driving forces. The company must find, exploit and transform these sources into cost advantages in relation to the competitors, whether the advantages are due to easy access to raw materials, the use of advanced technology or an efficient distribution facility. The continued focus on this task by the management group is essential for the successful realisation of the strategy.
The risk of choosing a cost-leader strategy could be that the company risks losing the control of the costs and lacks behind in technology as well as product and production- wise — and that by focusing on the costs it risks to neglect product- and market development. Also, products are often easy to copy and produced at lower costs.