Have You Wondered And Been Afraid To Ask …
There are so many business terms floating around that unless you have an MBA you might be very confused by business jargon. One term that I am asked about a lot is cost leadership. Have you ever wondered what is cost leadership? This article will simplify cost leadership.
Cost Leadership Defined
Cost leadership is a strategy used by companies to achieve competitive advantages by creating a low-cost position among their competitors. Think of it this way… cost leadership is a business strategy a company uses to maintain prices that are lower than its competitors. To do this the company will increase productivity and efficiency, and/or eliminate waste and/or, control their costs.
Clearly, none of these things are simple for a company to do yet this is how a company becomes the cost leader in its industry. As the company manages its value chain and lowers its costs through its entire supply chain the company can compete by being the lowest priced in the marketplace it serves. Cost leaders don’t just make a less expensive and poorly produced product. They must make a competitive product that can actually compete with others being sold. If the product isn’t able to compete then consumers will look elsewhere and stop buying from the company that is inferior even if it’s products are less expensive. Can you see how difficult this is? Maintaining the same quality product while lowering the costs of production is no small task. Companies can manage their costs many ways including by size, efficiency, scope and scaling.
Scaling is a way many companies become cost leaders. Think of companies who ship a lot of volume like Costco who are able to keep their production costs lower with their huge volume and provide products to consumers at a lower price point than their competition. This is exactly how these types of companies are increasing in sales and taking a large share of the market. Another example is McDonald’s who keeps their costs down by using staff who are not cooks and training them to cook in accordance with McDonald’s guidelines instead of having to hire cooks who would be paid more than these non-cooks.
What are ways your business can cut production costs or decrease operations and still provide a high-quality product that can compete with your market but for a much lower fee?
Post some ideas here.