When a company has the lowest cost for running its business operations compared to its peers, it is known as cost leadership for the company. This cost leadership arises due to the company’s scale of operations, the efficiency of operations, the size of the company, and the overall learning curve rate for the company.
Under cost leadership strategy, high-end Technology is being used for producing standardized products. Once the cost leadership for the company is established, it can compete better since it has better flexibility in changing the prices compared to its competitors.
This strategy is highly useful for gaining Market share and higher customer attention.
Real-World Companies Showing Cost Leadership
Walmart, McDonald’s, IEKA, Amazon, and thousands of other companies are great examples of having cost leadership.
A similar pattern in their operating style can be seen where they benefit from economies of scale, automation of their process, use of advanced Technologies, Rapid delivery, and efficient supply chain system.
These overall factors have brought down the effective cost per unit of operation for these companies.
To achieve cost leadership, these companies generally have:
- Access to high capital so that investment in technology and research can be done and ultimately cost can be reduced.
- A low-cost base for material, labor, and other overheads as compared to their competitors.
- A highly efficient system for logistics and people management.
Misconceptions About Cost Leadership
It is always unnecessary that the company with the lowest cost will offer the product at the lowest price. so, price leadership should not be confused with cost leadership.
If the price points of two competitors are the same, the cost leader company will be more profitable.
Also, cost leadership should not be considered as producing inferior quality products at a cheaper rate. It simply means that the company can reduce costs because of its long-time presence in the market, Research and technology advancements.
Basic Strategies to Achieve Cost Leadership
- Scaling the business operations: When the company scales and improves the production process, it increases efficiency, and consequently, the cost of production is reduced.
- Use of Advanced Technology: Using better methods of production ensures that the company would survive in the long run and deliver the product as desired.
- Improving operating efficiency: Getting more output produced in less time and cost is the golden rule of increasing efficiency and cutting the cost.
It is a strategy where the lowest cost is being charged to a focused customer segment so that they can be attracted and consequently retained.
This is a focused segment marketing strategy. The main success factor of this strategy is to deliver something extra to this specific market niche. This something extra may be in the form of reduced prices or the form of product differentiation.
Selecting The Niche Market Segment
It can be selected based on:
- Geographical area such as north of United States, any particular City, south of UK etc.
- Any particular product line such as dresses for children, specialized in hot Coffee etc.
- Based upon buyers’ groups such as adults, young, women, and old age etc.
Companies Using This Strategy
Some of the most valued companies in the world had shown the importance of cost focus strategy in the past. Apple Inc. had started with a specific focus on the segment of the personal computer only in the year 1977. The Porsche company which Volkswagen AG owns is specifically catering to the sports car segment.
Starbucks started its operations in 1971 with a specific focus on coffee-related items such as coffee beans, tea, and spices. There are thousands of other companies also who specialized in a specific market segment, improved their research and technology, and finally created a differentiated image as compared to its competitors.
Market Situation in Which Cost Focus Strategies Can be Applied
- When consumers have a unique preference that the competitors are not offering till now.
- When the market niche is big enough to provide reasonable profits to the company along with long-term high growth sustainability.
- When the company’s strength correlates with market segment niche.
- The customer gets bargaining power Since they have the same quality of product from multiple different suppliers. In this way, customers would be attracted towards the product which provides value for money.
Points of Difference Between Cost Leadership and Cost Focus
|Basis||Cost Leadership||Cost Focus|
|Meaning||Having the lowest cost with the same set of attributes of the product as compared to competitors.||Specialized focus on a market niche where products can be offered at a lower cost or differentiated products.|
|Market Segment||Generalized market segment.||Specific market segment.|
|Focus area||The focus is on reducing the cost at the same time ensuring the same quality.||The focus area is product differentiation so that A specific segment can be catered.|
|Scale of operations||The mass scale of operation and production.||The sale of evaporation depends upon the size of the market.|
|Suitability||When the company has access to high capital, high productivity, and lower-cost resources.||When the company has access to lower capital so as to a small segment only.|
Both cost leadership and cost focus are appropriate strategies for the company engaged in different industries. A multi-product company with large resources can use both the strategies as and when required.
However, cost leadership should be attained by constant cost reduction and maintaining the same quality at the same time. Similarly, Cost Focus can be very helpful when no competitor is catering to the specific need of a particular market.