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Cost leadership strategy - advantages and disadvantages

Marketing strategy

The cost leadership strategy is one of the three concepts aimed at developing a competitive advantage in the market. Is it profitable to follow such a model? What are the risks? Who is it for? We advise!

The power of competitiveness

Jack Welch, an American entrepreneur, once said that "if you can't build a competitive advantage, don't compete." Obtaining a better position in the industry than the rivals on the market is one of the most important factors defining the ultimate success of the company. A company that manages to develop a competitive advantage in its category has a better chance of generating attractive profits in the long term. 

All decision-making processes in the enterprise should result from a carefully prepared competitive strategy. The concept of strategy in the context of market advantage was first heard in the 1980s, when Michael Porter - one of the most prominent experts in the world of marketing - presented his original matrix defining three main strategies for competing on the market:

  1. cost leadership,
  2. differentiation,
  3. focus.

Running a business without any strategy is doomed to failure.

We will help you choose the right direction.

What is a cost leadership strategy?

The main idea of the cost leadership strategy is to achieve a competitive advantage in the market by minimizing costs related to production or other areas of enterprise management. The result is lower product prices while maintaining their high quality - at the same time, prices cannot be lower than the market average.

In other words, the company optimizes costs running a business in selected areas, and thus can offer customers lower prices for their goods, while guaranteeing them a specific quality of these goods. 

Applying a cost leadership strategy can have both positive and negative effects. What?

Advantages of developing cost leadership

Acting according to the cost leadership strategy provides the company with extraordinary profits, despite the existence of strong competition. Cost leadership allows you to maintain a stable position in the market. Low costs of running a business allow you to maintain financial liquidity, even in the event of a decrease in demand for the goods offered. 

Low costs compared to relatively high profits increase the free capital of the company. With proper organization of costs and proper strategic management, the company can invest in other aspects supporting its multifaceted development. The company's growth translates into increased interest from investors who can help the company achieve even greater success.

Cost leadership has a particularly high potential in those industries where price is the most important factor in determining sales - that is, where brand strength or brand loyalty do not matter much. Usually these are everyday products. Low price and high quality act like a magnet for customers. A company using a cost leadership strategy generates large ranges and thus achieves a greater share in the target market.

Disadvantages of using a cost leadership strategy

Operating on a cost-leadership strategy is not a rose-and-tumble path. A company, when deciding on such a solution, has to face many challenges that may effectively hinder its effective operation. Many people consider the necessity to constantly monitor trends and market changes and to quickly implement modifications in the areas affected by these trends and changes as a big disadvantage of the cost leadership strategy. Failure to adjust to the current situation may lead to a decrease in the company's efficiency and, consequently, to the loss of the competitive advantage achieved. 

Increasing competition may also be a problem, especially the emergence of competitors with more economic resources. Many companies are threatened by, for example, international corporations with increased capital. 

The implementation of a cost leadership strategy requires considerable financial outlays. This is mainly due to the need to purchase the most modern equipment ensuring the maximum improvement of the production process and optimization of process costs. High startup costs are an effective barrier for enterprises with small capital.

Who will benefit from it? 

A cost leadership strategy is a good solution for large enterprises that have capital to cover relatively high startup costs. Leadership will work where the offered product does not require complicated production processes, and the production itself takes place on a mass scale. Companies using a cost leadership strategy should offer basic goods without additions, limit their individual customization and refrain from personalizing services.

Well-known companies using cost leadership include:

  • McDonald's,
  • IKEA,
  • Amazon,
  • Ryanair.

What can the lack of a competitive strategy lead to?

Is it worth using a cost leadership strategy? Of course. Acting according to a competitive strategy - be it a leadership strategy or another - is the only chance to build an advantage and implement your business objectives. Michael Porter, author of 3 Competitive Strategies, believes that running a company without any strategy is doomed to failure. According to the expert, functioning without a plan may lead to a weak strategic position on the market. This is related to, inter alia, with the loss of low price priority customers, the loss of high profit margin deals because competitors focused on high profitability segments will take over. Operation without a competitive strategy is also the reason for the poorly formed corporate culture

Worth knowing:

What is cost leadership?

The cost leadership strategy consists in achieving a competitive advantage by minimizing costs, e.g. of production. Cost leadership allows you to achieve extraordinary profits, despite strong competition.

How to implement a cost leadership strategy?

The implementation of cost leadership is associated with financial outlays, and often also with the need to purchase the most modern equipment, ensuring the maximization of the production process and cost optimization.

What are the disadvantages of implementing cost leadership?

When implementing cost leadership, you should constantly monitor market changes and quickly implement modifications in the areas affected by these changes. Failure to react to changes may result in a decrease in efficiency and lead to the loss of the established position on the market.

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