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Cost leadership - an opportunity for a competitive advantage

Marketing strategy

The goal of each enterprise is to achieve a competitive advantage that will enable it to function efficiently on the market and seamlessly achieve its business goals. Michael Porter, an eminent marketing expert, distinguishes three main strategies for competing. One of them is cost leadership. What is it about? And how to achieve them? We advise!

Competitive advantage, according to Philip Kotler, is "the advantage of an organization over market rivals, which results from offering better value to consumers through lower prices or providing greater benefits justifying a high price." Prices - and the values associated with them - are therefore one of the most important factors influencing a company's position in the market. Developing cost leadership can make it much easier to run an effective business.

Cost leadership strategy in a nutshell

Cost leadership is a business strategy. Its idea is to develop an advantage by minimizing direct and overhead costs. In other words, it is achieving a privileged cost position in relation to market rivals. Thanks to this, it is possible to attract consumers with a lower, attractive price of the offered products, without reducing their quality.

Operating according to the cost leadership strategy aims to reduce expenses on a full basis cost optimization, financial control and experience. In a cost leadership strategy, it is crucial to minimize expenses in the areas of research and development, production, advertising, sales and service. At the same time, the reduction of costs must not affect the quality of the products or services offered. The product / service must be of a similar level to those offered by market competitors. Only then will it be acceptable to buyers. In its cost leadership strategy, the firm focuses on the customers who matter most to its success in the marketplace while avoiding those who do not contribute too much. 

Cost leadership - is it worth pursuing?

Skillfully used cost leadership strategy leads to achieving a leading position in production at low costs. If the company manages to develop and maintain cost leadership, it will achieve above-average profits, even in the presence of strong competitive forces. Moreover, cost leadership gives the company a guarantee of profits even when competitors lose their competitive advantage. 

Cost leadership is also an excellent protection against suppliers, especially against volatile pricing policies. This is due to the high flexibility of rising prices of raw materials and components.

What to look for?

A company that wants to develop cost leadership in the market must first of all take care of the high quality of its products - which we mentioned earlier. The product must be of outstanding quality and its price must not fall below the average. But that's not all. It is also crucial to carefully monitor any changes in technologies that directly or indirectly affect the company's operations. In order to maintain continuity and efficiency of production and generate profits, it is necessary to choose the optimal technology and implement new solutions in production. It is also important to constantly modernize the production park by quickly replacing the necessary equipment. 

How to achieve cost leadership?

Developing cost leadership is only possible if the company has a significant market share or has other benefits, such as access to outstanding raw materials. Moreover, implementing the strategy requires a considerable start-up capital. The additional costs are mainly related to the purchase of equipment allowing for the improvement of production, as well as losses, which are typical for the first stages of introducing a strategy. 

For cost leadership to be achievable, price must be an important factor in a given market. Product homogeneity is also crucial, allowing multiple companies to compete. Moreover, the importance of the brand cannot be high. The motivation of customers to buy should therefore be the willingness to spend as little as possible, and not brand loyalty or preferences. 

A company may seek to develop cost leadership in several ways. Among them we will mention:

  • economy of scale,
  • striving for optimal use of inputs, raw materials and technologies,
  • production of standardized goods (simplified structures = lower production costs),
  • using a cost reduction culture (involving all employees in the cost reduction process),
  • relying on large market segments, avoiding unnecessary costs.

What instead of a cost leadership strategy?

Michael Porter mentions next to the cost leadership strategy competitive strategies: concentration and differentiation.

The first one, the concentration strategy, focuses on one specific market segment, i.e. a specific group of buyers, product lines or geographic market. Its idea is a carefully selected goal that allows you to develop an advantage over competitors by better meeting your needs, low cost in a given segment or by combining both solutions. The limitation in the strategy of concentration are the small possibilities of increasing the market share and the need to balance between profitability and sales volume.

The diversification strategy consists in producing products / services perceived on the market as unique, through unique design, technology used, outstanding customer service or an excellent brand image. The use of a differentiation strategy enables the achievement of a competitive advantage according to Porter's five forces model. Competitiveness in this case is built on customer loyalty and low price sensitivity. Unfortunately, differentiation does not allow to achieve a high market share and requires higher prices for the offered product (due to their exclusivity). This, in turn, limits the target group - not every consumer will be interested in the brand's products due to high prices.

What strategy to choose? It is an individual matter for each company. Cost leadership is one option. The choice should be based on a detailed analysis of the company, taking into account its strengths and weaknesses, opportunities, as well as opportunities and threats resulting from the market in which it operates. 

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