Cost leadership strategy

Cost leadership is an effective businesslevel strategy to the extent that a firm offers low prices, provides satisfactory quality, and attracts enough customers to be profitable. While some may feel that a lower cost equals a lower quality product that is not always true. Many companies have had great success fulfilling the role as cost leader while still offering products that consumers want and appreciate. This means they try to find ways to reduce costs in their company so that they can offer a product at a lower price than their competitors. Because so many customers want to pay a lower price for goods and services, these companies can gain a wide audience and become the cost leader in the industry.

1 WHAT IS COST LEADERSHIP ? An effective business-level strategy to the extent that a firm offers low prices, provides satisfactory quality, attracts enough customers to be profitable Challenging: the ability to charge low prices and still make profit  Spend little on advertising, market research, R & D  Achieve superior profitability than other competitors at the same price  Reply on economics of scale to achieve efficiency created by selling more items Some approaches of cost leadership Low cost in operation processes, distribution chains, raw materials o p e r a tio n process Keep low inventories & only build computers to orders Offer basic fast-food meals at low prices Hire & train inexperienced employees rather trained cooks Sell cheap but stylish furniture Source products in low – wage countries & offer a very basic level of service Advantages Disadvantages  Protect from industry competitors  Affect to the demand  Have high market share if getting high profits  Competitors may lower their cost structures  Less affected by increased prices of inputs or a fall in price of outputs  Be imitated the cost leader’s methods  Purchase in large quantities increase bargaining power over suppliers  Low quality of products makes business suffer  Reduce price to complete with substitute products