11. Many companies employing the cost leadership strategy might find the cost related to the research and development team undesirable. It exploits the scale of production, by producing highly standardized products using advanced technology. In the previous article, we discussed the strategy of differentiation along with some examples.Today, we will talk about another one – Cost Leadership, and we will see some of the best real-world Cost Leadership examples to help us understand the concept.. Strategies can range from competitive pricing to hiring skilled teams to reduce cost and all of them can be focused on one and only one goal “success and long-run stability” of the company. Most customers want to feel valued not just when they buy from a business but also when they require after-sales service. Cost-leadership is among several general business strategies developed by author and well-known business management guru Michael Porter. Airline require you to stop in their hub to connect between two cities, Instead of flying several flights into and out of major airports, low-cost carriers utilize the point-to-point system which employs flying between two cities directly, regardless of size, Slower turnaround time of usually one hour, Faster turn-around time usually half an hour, Utilization of mediators such as travel agents for booking tickets. Cost leadership strategies are much profitable for such kind of organizations that have a market in which there are price-sensitive customers; there is a large number of customers with bargaining power, there is a limited number of methods to acquire product differentiation or when customers do not consider the differences among brands, etc. Examples include home renovation companies specializing in one aspect such as kitchen or bathroom remodeling who can save on raw material cost and work with wholesale distributors to achieve the best pricing on their packages and flat fee brokers which offers fixed commission fees and included services to clients. Companies with the lowest cost of operation have higher chances of survival during downtimes. A cost leader can also be a price leader in its industry. An alternative to leveraging cost-leadership to earn higher profits is to use it to increase customer demand and market share. It can also generate profits that can be reinvested to improve the product quality while charging the same price as the average in the industry. By employing cost leadership strategy, a company will not only be able to gain profit but eventually increase its market size as some consumers shop only at stores that offer the lowest price. (Most competitors outsourced trucking.) also provide substantial entry barriers in terms of scale . In the area of competitors, the cost leader is protected by its cost advantage.
If you can sell products and services with a lower cost basis and competitive pricing, your margins are greater than companies that invest more to produce products of a similar quality. Consequently, leading to a crowded market and a drop in market share. To compete against such luxury-car makers as BMW and Mercedes-Benz, Toyota management started making Lexus a car with premium-quality at costs below those of competitors. Thus a low cost position protects the firm against all five competitive forces” (Porter, 1980, pp. Cost leadership aims at having the lowest costs in a market. Especially when keeping its quality the same. They also offer less option on customization, which further helps them purchase similar raw materials for their work at a discount. Retailing Types, Functions, & Characteristics, How Does Udemy Work? © 1999-2020 Study Finance. Strategic planning can take any organization to its pinnacle. In essence, one option for a low-cost leader is to achieve more earnings from their products than competitors with higher costs. A cost-leadership strategy is a broad approach to business whereby a significant aspect of a company's strategy is an effort to operate as the lowest-cost business in its industry.
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