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BlogCost Leadership: What Is A Cost Leadership Strategy

May 7, 2017

Business Level Strategies

There are two generic business level strategies. One is cost leadership which is how to generate economic value by having lower costs than your competitors.  A great example of a company using cost leadership is Wal-Mart.  Another strategy is product differentiation. Product differentiation is where you generate economic value by offering a product or service that customers prefer over other brands.  A great example of product differentiation is Harley-Davidson.

It is important that you understand cost management in your business, regardless of which strategy you choose. Do you know who has the cost advantage in your market? You want to develop a strategy to exploit the cost advantage or to compete on some other basis.

Sometimes companies have the cost advantage because they are in the right place at the right time or are first into a market or they have a natural endowment or they have locked up a source.

southwest 300x264 - Cost Leadership: What Is A Cost Leadership StrategySome companies have cost leadership because the way they are serving the market. Think of Southwest Airlines as an example. They offer a level of quality that is inexpensive to produce and have made policy choices that give people incentives to reduce cost at every opportunity.

You can use cost leadership to gain a competitive advantage when your source is valuable, rare, costly to imitate or well organized and implemented appropriately. Rareness might come from economies of scale, diseconomies of scale, learning curve economics, differential input access, technology or policy choices.

No matter what strategy your company is considering, remember that a strategy is only as good as its implementation.  A strategy is implemented through organizational structure and control.  A structure is the division of management responsibilities and the establishment of reporting relationships. Control is policies intended to influence behavior that align the interests of the individual with the interests of the organization.

Share your cost leadership strategy here.

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