What is Cost Leadership Strategy ?
Cost leadership is a kind of Strategy that is used by many companies to improve their position in the market. The basic idea is to become a leader in costs in this market closely and control of costs and expenses related to the continued operation of the company. This helps the company to attain a safe position in the event of price war between competitors while increasing the chances of being able to maintain a reasonable profit margin.
How is Cost Leadership Achieved?
With the cost leadership process, the key is to assess the business model and make sure it works at the highest level of efficiency possible. This will involve evaluation of every aspect of the operation and the elimination of waste and extra costs on a continuous basis. This will often lead to the purchase of raw materials at the lowest possible price which may order the company to effectively manage the work. This will even rationalize the actual manufacturing process of the company so that the highest possible percentage of raw materials used or consumed for products required for budgeted sales. From this point of view, company has to reduce cost at every stage of the operation without compromising with the quality of products.
By means of cost leadership, a company is able to set the price of its products at a level that will easily compete with others on the market and the company will earn the most profit possible. This approach isolates the company to experience greater difficulties during the time of probable price war. If a company runs with low operating costs, there is a good chance of holding its market share better than others who are not not active on the same cost leadership approach.
Advantages of Cost Leadership:
The advantage of cost leadership is that during periods when price wars occur, the company will usually be able to produce more and will enjoy a significant return on each product. The concern for the cost leadership is likely to attract the attention of new or returning consumers. At the same time, the company using the cost leadership approach is able to earn more profits that can be used to create a contingency fund for the uncertain future. There are different long-term benefits also which will enable the business to continue for a number of coming years.