Every business needs a strategy to be competitive. Michael Porter recommends three business strategies for small businesses. They are – cost leadership, differentiation, and focus. I do agree that these are foundational for any smart business strategy.
Your business needs to have a competitive advantage to have secure a leading position over competitors. If you select cost leadership this means you will be the lowest-cost producer in your niche. Differentiation means you have a unique product or service to offer. Focus means you are only providing low cost or differentiated services and products to a segment of your market.
I will address cost leadership in this article.
A business that is using cost leadership as their strategy wants to achieve the position of being the lowest-cost producer in their niche. If a business can produce their products at the lowest cost then they can compete with everyone else in their niche on price. the manufacturer can compete on price with every other producer in the industry as a whole. By producing at the lowest cost, the manufacturer can compete on price with every other producer in the industry, and earn unit profits, if the manufacturer so chooses.
To obtain cost leadership in your industry you will need to use the latest technology and also need to use the lowest cost labor. In addition, you can increase productivity and will want to minimize costs. The cost leader demands the lowest costs from vendors and because they sell at the lowest price they usually sell a lot more and therefore vendors will negotiate down with them.
Beware Of This Problem With Cost Leadership
One problem that occurs with cost leadership is that it focuses on the company and not on consumer demand. I believe you must use cost leadership in conjunction with other strategies for this reason. If you aren’t differentiated and focused you might be the lowest cost and yet might not have the bulk of your market share.