Cost Leadership: Your Competitive Advantage
Michael Porter is said to have developed the concept of cost leadership strategy. The cost leadership strategy definition is, in my words, the way a business establishes its competitive advantage. Think of cost leadership as the lowest cost of operating your business in your niche or industry.
I believe I need to get into some specifics on this topic. Let me begin by answering the common question I hear when I mention the term cost leadership. The question is, typically, “What is a cost leadership strategy?”. I answer this by saying the business who gains a competitive advantage over competitors is typically doing this through cost-leadership strategy by reducing its operating costs below the niche competition. To answer, “What is cost leadership strategy”, let me give you some cost leadership strategy examples.
One low cost leadership strategy might be in economies of scale. Often, a business can lower its operating costs by lowering the average cost per unit of production. If a business has high production and low costs for production then average costs per unit of production get lowered. Think of a company that is producing large quantities of a product. They purchase from suppliers in bulk so they get a price reduction and can sell the items with a great profit. In addition, a business that has high production can also spread its operating costs, like research and development and bookkeeping, over more units. Low cost leadership strategy works best when you have a lot of competition in your niche and price is a competitive force. Your business should consider low cost leadership as a strategy to implement if you have competitors in your space.
So, you may still ask, “What is cost leadership strategy and can you share an example?”. Here is one for you that will clearly show you what overall cost leadership strategy is by showing you examples of real companies. Remember the car called the Yugo? This car was around in the 80’s and sold for under $5,000. It had a very attractive price and was affordable for many people. Why did the Yugo fail? The fact is the manufacturer didn’t produce a quality product for the price and the car had poor dependability and when word got out people stopped buying.
In comparison, one of the best cost leader examples is Walmart, which has used a cost-leadership strategy to become one of the largest company in the world. Walmart is known for having low prices and saving shoppers money. Walmart has great pricing due to the amount it sells. One-third of Americans has shopped at Walmart. With such a large customer base they buy in large quantities and have lower pricing than other stores so they are keeping costs down and can pass those cost savings on to consumers.
Now that you understand the concept of cost leadership and what a cost leadership strategy is, how can you apply this to your business? Comment below.