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Faced with a global economy like the current one, with so much competition, companies are looking for a competitive advantage, which is generally based on cost leadership, which allows the company to offer products or services at the lowest market cost.
The challenge of the cost leadership strategy is to obtain a convenient benefit for the company and move the profitability of the different market players.
What is a cost leadership strategy?
These are strategies with which products similar to those of other companies are offered at a lower cost, that is, a certain company proposes to be the lowest cost producer in its industrial sector in order to achieve a differentiation.
At lower prices than its rivals, the leader’s position translates into higher returns, however, standard products should not be sold ignoring the basis of product differentiation itself, since, if the customer does not perceive the product as comparable, The company must set very low prices in relation to the competition to achieve sales.
The sources to obtain this type of advantages are varied and depend on the structure of the industrial sector itself, including economies of scale, the use of proprietary technology, preferential access to the raw material, among others.
The cost leadership strategy aims to make a company the leader, rather than several companies struggling to reach that position, as this implies tough rivalry and competition that can have unfavorable consequences for all.
Variables to consider in the cost leadership strategy
This strategy seeks or aims to reduce costs, for this, the analysis of elements and variables such as:
- The costs of materials and raw materials: It is achieved through the diversification of the raw material, acquisition of imported raw materials at a lower cost, establishing stable relationships with suppliers, etc.
- Improvement or modernization of production techniques: In such a way that efficient use of raw materials, increase in quality and use and minimization of waste in the different stages of the production process is incurred.
- Adaptation of the product design to international parameters, which reduce costs, obtain competitive advantages.
- The innovative capacity and the increase of skills to reach the desired competitiveness and not to keep a product at a lower price without achieving sales.
- Economies of scales, the specialization that allows the company to achieve an optimal level of production and continue producing more at lower cost. That is, production increases and the cost per unit is reduced.
- Cost sharing with other businesses (Industrial Dumpíng).
- Optimization and proper use of the installed capacity, which allows the maximum use of the productive potential during a certain period of time.
- The relationship Fixed costs-Variable costs, in order to control the final cost of the product.
Advantages of the cost leadership strategy
Working with reduced costs, allows the company:
- Achieve greater sales volume.
- Obtain higher profit margins.
- Hold and endure price wars between the competition.
- Undertake various pricing policies, as a company that achieves success with this strategy is because it has lower costs, which allows it to lower prices aggressively to eliminate competition.
Disadvantages of the cost leadership strategy
The company uses this strategy, has established the production of certain products, with certain specialized processes, which reduces the company’s flexibility when it comes to adapting to changes in demand or technology.
In this sense of cost reduction, the company does not care about activities such as research and development.