Cost Leadershhip – Is it the Right Strategy for You?

Cost Leadership is one of Porter’s three generic strategies for achieving and sustaining a competitive advantage over your rivals (the other two being Differentiation and Focus), and can be applied to any sized business in any industry. If you are considering choosing Cost Leadership as your main strategy for getting ahead of your rivals, you will have to be very confident of succeeding – larger organisations in particular, such as manufacturers, will have to invest heavily at start up. Cost Leadership, in essence, is about operating at costs lower than that of your competitors.

Costs have to be reduced in every aspect of business, including, overheads, cheaper premises, production, marketing, supply and distribution, etc. It is very much a ‘no frills’ strategy and is not aimed at providing luxury for the customer.

Think about McDonald’s as one example. It offers high volume, low cost food from basic premises; there is no table service; employees are offered little or no training and are paid low wages for long hours. Further costs are reduced by bulk buying where pressure can be put on suppliers to cut their prices.

IKEA is another example. It keeps costs to a minimum by sourcing its products from low wage countries and offering a basic service to customers. It sells standardized and mass produced, flat packed, low cost furniture that the customer has to collect from its warehouse then assemble at home. Storing its products in its own warehouse also adds to considerable savings.

Service industries can also save costs by streamlining and increasing efficiency. Replacing out-dated systems with new technology can lead to massive savings. Outsourcing time consuming tasks such as book-keeping is another way to reduce costs. Introducing Video Conferencing is another cost-cutting example where people don’t have to waste valuable time by travelling to meetings.

Being a Cost Leader has its risks too. There are always new competitors ready to enter the market and your initial high capital investment may not be enough to deter them. Just as they will always be looking for ways to cut costs and undercut you, you should always be searching for ways to keep costs at a minimum; to keep ahead, and maintain your competitive advantage.To be a successful Cost Leader and remain competitive, you must always be alert to new cost-saving innovations and be prepared to incorporate them as quickly as possible into your business model.

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