Cost Leadership Strategy

In the services industries, the cost leadership strategy of Southwest Airlines, and Ryanair whose CEO Michael O’Leary visited and studied the business model of Southwest, further illustrate how cost leadership strategies can lead to profitability over the long-term (Box, Byus, 2007). For Southwest Airlines, their cost leadership strategy is predicated on creating a competitive enough price point so that customers will consider them a viable alternative to driving (Box, Byus, 2007). Given the purchasing strategies Southwest has relied on consistently for oil futures contracts, the challenging yet achievable goal has been realized.

A COST LEADERSHIP STRATEGY is based on the concept that you can produce and market a good quality product or service at a lower cost than your competitors. These low costs should translate to profit margins that are higher than the industry average. Some of the conditions that should exist to support a cost leadership strategy include an on-going availability of operating capital, good process engineering skills, close management of labor, products designed for ease of manufacturing and low cost distribution.

Cost leadership strategy means selling the goods at the cheapest price in the market. Some good examples of cost leaders in the market are Wal-Mart, australiawholesalers.com dailytrader.com or francewholesalers.com which sell relatively cheap products due to the advantage of bulk quantities at wholesale prices. The logic of the cost leadership strategy approach is driven by volume and market share where more sales than any other competitors lead to greater profitability. Essential to this generic competitive strategy is efficiency and the ability to keep costs to a minimum.

Organizations that achieve the greatest possible results from a cost leadership strategy concentrate on broad markets where their price leadership can be translated into a significant competitive advantage. This often involves defining their market position as one of being a lower-priced substitute to another product or service. For Wal-Mart the position of low price leader is undercutting higher-end retailers and for Southwest, making air travel as affordable as driving.