Cost leadership is a term used when a company positions itself as the cheapest manufacturer of a particular product or commodity in a competition. To use the strategy, management must constantly work on reducing costs at every level. This strategy is usually applied by businesses that enter the market and aim to gain market share among the customers who are not ready to pay higher prices. The cost leadership strategy type of competitive strategy is characteristic of saturated markets with high competition. This presentation will discuss the most descriptive features of the cost leadership strategy and provide examples of its application.
Cost Leadership Definition
The companies use the cost leadership strategy to attract as many customers as possible. Companies can sell their products in low-price stores, which allows them to attract more customers because some customers choose products based solely on price. This strategy is potentially successful because of its stability and practical approach to securing a competitive advantage. However, the companies, despite the stabilization of revenues, may experience stagnation due to a lack of investment in product development and customer service.
Cost Leadership vs. Price Leadership
Cost leadership and price leadership strategies are not the same. The first focuses on practical solutions to reduce the price, such as searching for cheaper materials, reducing advertising and service costs. The second dampens the price to get the market share through sacrificing profits. In other words, the cost leadership strategy is a gradual consolidation of positions through the maximum reduction of production costs, while the price leadership strategy is aimed at an immediate and unreasonable price reduction and is more of a tactic than a strategy.
Central Benefits of the Cost Leadership Strategy
The main advantage of the cost leadership strategy is stability and balanced growth. Low production costs help to survive times of crisis more easily, and savings lead to the accumulation of profits. As a result, companies get the opportunity to invest excess capital in business expansion, technology modernization, and research. Most companies apply this strategy to some extent because its main advantage is to ensure the company’s survival in the market in conditions of limited resources.
Disadvantages of the Cost Leadership Strategy
To succeed, companies are constantly cutting costs, and this leads to a drop in many important indicators, such as service quality, staff development, and investment in innovation. Companies stop being interested in changes in the market and ignore customer feedback, which can lead to product obsolescence. Equally important, if other players are using a similar strategy, it is difficult for the company to find an additional resource to overcome the competition. Moreover, in case of insufficient growth, the company may go bankrupt.
Examples of the Cost Leadership Strategy: Walmart
The main advantage of Walmart is lower prices than those of competitors. The company has succeeded by relying on efficient supply chains and sufficient capital for bulk purchases. Strong purchasing power has enabled the company to provide a wide range of products, including groceries, home, and entertainment stuff. Walmart was able to overcome the main characteristic weakness of the strategy and successfully engage with customers through discounts and convenient delivery.
Examples of the Cost Leadership Strategy: Mcdonald’s
Mcdonald’s is one of the most famous and successful fast-food restaurants in the world, which uses the cost leadership strategy. The company’s success was made possible thanks to the gradual optimization of work processes to perfection and low production costs. Equally important, Mcdonald’s considers some values a priority and adheres to the high quality of its products. The company hires a minimum number of managers but conducts constant workforce training. Investments in product development, attention to new market trends and customers during service are the keys to success of the cost leadership strategy in this case.
Examples of the Cost Leadership Strategy: Ikea
Ikea is another example of a successful and well-known company that quickly achieved success thanks to the effective use of the cost leadership strategy. At the time of the start of the business idea, the purchasing power of most potential consumers was limited, and Ikea used all possible tricks to reduce the cost of products. One interesting example is the reduction of shipping costs through the sale of furniture in disassembled form, which allowed for a considerable reduction of prices (Chaudhuri, 2019). Unfortunately, Ikea cannot be called a truly ethical business, as the company involves workforce from countries with lower wages. The company provides only a basic level of service for its customers, although it is known for interesting offers, such as exchanging old furniture for discounts on the purchase of new ones.
Examples of the Cost Leadership Strategy: Levi Strauss
Levi Strauss has been producing its goods for almost a century, and during this time the use of the cost leadership strategy proved its effectiveness for the company. Levi’s focuses on producing jeans with a classic shape, and this allows to reduce costs, including the cost of developing more fashionable models. Levi’s has identified core priorities such as quality and ethical manufacturing practices that help them achieve sustainable success. In recent years, the company has been a member of PaCT and is responsible for reducing water and electricity consumption in its production facilities and among its suppliers (“IFC releases Levi Strauss,” 2020). The company promises to reduce greenhouse gas emissions in the next five years.
Examples of the Cost Leadership Strategy: Toyota
The company entered the global market in the 1980s when most Japanese enterprises successfully launched businesses after a long period of depression due to the World War II. Interestingly, the Japanese companies used advantages of democratic government, free markets, and the rule of law, which created an atmosphere for innovation. The company’s main achievement was the creation of tools for manufacturing perfect cars and focusing on experiments to produce even more sophisticated products. The company managed to save its positions in the market in 2022 and presented a new line of electric cars.
Examples of the Cost Leadership Strategy: Dell
Dell entered the US market in 1984, and its central idea was that its customers should have easy access to technology. The company used the cost leadership strategy through the optimization of prices for computers parts and producing the cheapest models available to the general public. Along with cheap components of its production, the company introduced technological developments and quickly became the sales leader in the US market. In the late 1990s, the company entered the Chinese market and by 2004 became one of the sales leaders (“How we got here,” 2022). In addition, the company used the product differentiation strategy, studying the urgent needs of customers.
Generic Leadership Strategies
Leadership strategies are called generic leadership strategies as they represent three typical basic approaches to market leadership. Cost leadership, product differentiation, and focus on customers are the main strategies and companies use them depending on the market conditions. A combination of strategies is no exception and often adds to a company’s competitive advantage. For example, Mcdonald’s combines cost leadership and client-centric strategies, the same can be said about Ikea, while Toyota and Walmart additionally apply product differentiation strategies.
Generalization on Cases
Cost leadership strategy is used by companies in all sectors of the market – retail, restaurants, supermarkets, apparel, cars, and computers. Each company tries to follow the traditional rules of the strategy and combine the main strategies of market leadership. Cost leadership strategy on particular markets is an integral component to ensure survival, while other generic leadership strategies allow choosing the direction of development most promising for each company. For example, a typical competitive advantage of Mcdonald’s is staff training, Ikea chose innovation in logistics, and Toyota – innovation in production and orientation to new trends and customer feedback.
How Companies Use Benefits
All companies have successfully taken advantage of the cost leadership strategy. The most important feature of the strategy is to ensure a stable competitive advantage through cost reduction. For this purpose, companies chose different ways – such as using optimal supply chain in Walmart and Dell, the scale of sales for Mcdonald’s, and the optimization of production for Toyota, Dell, Mcdonald’s, and Ikea. Companies used profits to invest in business development, using different strategies.
How Companies were Trapped by Disadvantages
Some companies were trapped by disadvantages, such as reduced or absent costs for innovation, lack of attention to product development, customer service and personnel development. Such deficits are undesirable because as a result, the company loses a share of customers who are not satisfied with the quality of the product or the accompanying service. For example, Walmart shows inattention to customer feedback and does not offer proper service, which causes it to lose some customers. At the same time, Ikea poorly uses the potential of innovation, although it conducts product development. Toyota is sometimes criticized for inadequate funding of personnel development.
The cost leadership strategy is a generic strategy used by companies in markets where consumers are ready to pay for the product with the lowest price. If markets have other distinctive features, such as demand for innovation and product modifications, companies can additionally apply other generic strategies. The main advantages of a cost leadership strategy include stable development, coverage of a wide market segment, and increased sales. Disadvantages feature a lack of investment in business development, which leads to product obsolescence, poor service, inadequate employee development, and lack of innovations. In general, the cost leadership strategy is one of the most common, as it most effectively solves the main problem of the economy – the scarcity of resources.
Chaudhuri, S. (2019). Inside IKEA’s strategy to stay relevant as consumers change. The Wallstreet Journal. Web.
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Vanichchinchai, A. (2022). The effects of the Toyota Way on agile manufacturing: An empirical analysis. Journal of Manufacturing Technology Management, 2(5), 1-10.
Levi Strauss. Web.