Cost Leadership Strategy

It goes without saying that businesses with the best cost leadership strategy are at the forefront of the industry but  how does a business engaged in a low cost strategy without compromising other key business objectives such as quality and customer satisfaction.

Cost Leadership Strategy as A Competitive Weapon

As the business enviroment become even more dynamic, a robust cost leadership strategy within the framework of corporate strategy is vital in order to ensure the success of the organization. It should provide the direction that the whole organization can pursue to secure the company’s future survival and success. 

There are types of generic strategies that companies must possess to achieve competitive advantage. The first generic strategy is cost leadership strategy and the others are differentiation and focus strategies. Competitive advantage can be defined as anything which gives one organization an edge over its rival in the products it sell or the services it offers.

Genrally, cost leadership is about being the lowest cost producer in the industry. For an organization to gain competitive advantage, it must achieve overall cost leadership in an industry it is competing in. For companies competing in a “price-sensitive” market, cost leadership is the strategic imperative of the entire organization. It is vitally important for these companies to have a thorough comprehension of their costs and cost drivers in order to pursue a cost leadership strategy. They also need to fully understand their targeted customer group’s definition of quality, usually denoted in terms of design specifications, contractual requirements, delivery and services at the lowest possible cost. Of particular importance will be for the company to attain a cost level that is low relative to its competitors.

For companies not competing on price, a cost leadership strategy is still vitally important. Companies competing in the industry through product and service differentiation will need to focus on cost effectiveness and quality to maintain or enhance the value perceived by their target customers. Customers will select products and suppliers that provide value which equals or exceeds the actual and perceived cost both at the time of purchase and over the product’s life. Price remains a function of value, although not  to the same extent as for an undifferentiated market.

Therefore cost leadership must be a goal of every organization, regardless of their specific market orientation. Companies that possess a  cost leadership strategy enable them to defend market share, defend supply, build  entry barriers, weaken threat of substitutes, defend market share against rival, increase market share, enter new markets and reduce the cost of capital.

There are many techniques and methodology that organizations can use to lower cost of products and services by lowering defects and improving quality. Among the popular and successful techniques used by successful organizations worldwide in enhancing quality, productivity, lowering cost are Six Sigma methodology, Kaizen, Lean Thinking, Total Quality Management (TQM), Benchmarking Competitors,  Just-in-Time (JIT), Supply Chain Management (SCM), Total Productive Maintenance (TPM) and MRP solutions.

Achieving a low cost position and maintaining a cost leadership strategy protects the company against all five of the competitive forces as highlighted by Michael Porter. However, a low overall cost position requires sustained commitment throughout the organization from senior executives to line employees.

The ability to improve performance and reduce costs is one of the key competencies for corporations. Control and Analyzing of costs are no longer simply concerned with monitoring departmental budgets, but involves putting in place a cost structure and strategy after severe analysis has been conducted that will benefit the organization by optimizing the processes, which will add value to the products and services. Reducing costs require identifying and analyzing the activities which are undertaken, measuring their value and cost, and relating these activities to the outputs of the organization. Value Cost Analysis (VCA) is a pragmatic approach for managers and executives to execute an action plan.

It has become widely accepted that a comprehensive cost leadership strategy in manufacturing and service industry can give a company a distinct competitive advantage in the marketplace and provide operational support for the corporate strategy.