If your industry is highly competitive, you’ll need a variety of strategies to stay ahead of the pack and stay in demand.
The cost leadership strategy employed in strategic management is one such method that you’ll find to be extremely useful for gaining the competitive advantage.
The cost strategy has been around for a while, but it’s still useful for modern business processes and successful marketing plans.
You can create a special cost-saving strategy that will give you a competitive edge in the industry you operate in by learning how this strategy functions and how successful businesses are implementing it.
Take a look here at what a cost leadership strategy actually is and some cost leadership strategy examples that have worked for well-known businesses.
What is cost leadership?
The phrase “cost leadership” is used when a business positions itself as the industry’s lowest-cost producer or supplier of a specific good or service. Because the management must constantly work to reduce operational costs at every level to stay competitive, implementing this business strategy is challenging.
Although it is very successful at capturing market share and grabbing customers’ attention, it is challenging to implement. The company’s management team must continuously strive to bring down the price of not just one product but the complete portfolio of goods offered by the business.
Cost leadership does not imply that a business produces products of lower quality at relatively lower costs. That course of action will eventually fail. To use this strategy, a business must create goods that are of acceptable quality, specific to a group of customers, and offered at a price that is significantly less than or on par with that of other businesses that make the same product.
Cost leadership vs price leadership
Cost leadership and price leadership are two completely distinct ideas that are frequently used interchangeably.
- Cost leadership is concerned with creating a competitive edge by reducing the cost of doing business in the sector. While leading on price simply means offering the best deal.
- In its business, a cost leader may also be a price leader. However, it’s crucial to remember that a company that sets the lowest prices for its goods or services frequently sees a decline in profitability as a result of prioritising market dominance.
- Cost leaders, on the other hand, concentrate on a system that aims to boost productivity and lower production costs below the industry average, which can enable the business to experience balanced development. These wouldn’t be regarded as price leaders but as cost leaders.
4 cost leadership examples
Ryanair
One of the most well-known cases of cost leadership is undoubtedly RyanAir. The Irish-based low-cost carrier, which was founded in 1984 and currently operates a fleet of 469 aircraft (including affiliates), flies more international passengers than any other airline in the globe.
The company’s plan to take the cost leadership advantage by offering air travel services at the lowest feasible unit cost forms the foundation of its competitive advantage strategy.
There are no services included that will have their costs passed along to the customer. No complimentary meals, onboard entertainment, lounge access, or first-class accommodations. This enables them to maintain a single price for everyone.
RyanAir also reduce costs in the procurement of replacement parts. They can buy spare parts in bulk to cut expenses because they only maintain a few brands and models of aircraft.
Primark
The production of Primark’s clothing takes place in developing countries where wage rates are lower. The business also saves money by using a conservative strategy for advertising, relying solely on word-of-mouth and social media instead of an elaborate branding campaign.
In order to gain a competitive edge, Primark also uses economies of scale by stocking in large amounts and reducing costs.
Additionally, they have a digitalised network for customs clearance and distribution that drastically cuts the time it takes for products to reach warehouses and customers.
McDonald’s
McDonald’s has simplified and made it straightforward for all employees to learn the food preparation procedures, minimising the learning curve to the greatest extent feasible.
The business also has a division of labour that enables them to hire and train freshers rather than employing cooks who have already received training, which enables them to pay cheap wages.
The fast food chain has also incorporated vertical integration into it’s cost focus strategy, McDonald’s has lower costs than rivals because it controls the factories that make the ingredient mixtures for its products.
Ikea
IKEA has significantly benefited from its cost leadership strategy by producing massive quantities of standardised goods that consumers can actually assemble themselves. The global corporation currently runs 433 stores in 52 nations.
Here are some reasons why IKEA is the undisputed champion in the furniture sector when it comes to affordability:
IKEA doesn’t provide customised products, unlike rivals. Almost all of them are standardised, enabling the business to produce them in significant quantities for all of its stores around the globe, and reach economies of dimensions that smaller rivals simply cannot.
IKEA outsources the production of its goods to low-wage nations, like many other businesses do, this cost leadership strategy aims to ultimately keep costs as low as possible.
Interestingly, in addition to its advantage in cost leadership, IKEA also employs a diversification strategy to some degree. People loved the company’s cutting-edge business model right away, which it virtually invented.
Cost leadership strategies FAQs
What are the basic characteristics of the cost leadership strategy?
Businesses that employ the cost leadership approach have the following traits: Businesses go after markets with strong demand, the business makes minimal investments in marketing, development, raw materials and study. The business has the lowest rates in the sector.
How does a company achieve cost leadership?
When a business leads the industry in cheap pricing, it is said to be engaging in cost leadership. A company must cut costs in all other aspects of the business, such as marketing, distribution, and packaging, in order to accomplish this without significantly reducing revenue.
What is a cost leadership strategy in simple words?
The phrase “cost leadership” is used when a business positions itself as the industry’s lowest-cost producer or supplier of a specific good or service.
Does your small business need help with cost leadership or growth strategies?
The business strategy experts at Growth Idea can assist you in creating the best corporate and business strategies for your small business.
Our team of professionals strives to increase your chances of success. Contact us right away for a complimentary consultation if you’re prepared to advance your business. We’ll collaborate with you to develop a customised teaching strategy that meets your unique needs and objectives.
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Shweta Jhajharia
Shweta Jhajharia is one of the leading authorities on Business Value Building and the creator of the unique 6M Model. Shweta is widely respected as an impactful, intelligent and results orientated professional who helps business leaders unleash their potential to reach meaningful, higher objectives. This realisation of potential and maximisation... Read more
