Understanding cost leadership
Cost-leadership is when firms gear their entire operations to strip out costs. While some firms try and increase the customer’s willingness to pay with a differentiation strategy, cost-leadership is when firms primarily compete on the basis of price. Customers may sacrifice some of the features or service of more premium offerings to achieve a lower cost position.
Beyond just a low price
While price is one of the key dimensions for why a customer may turn to a cost-leader, it is just as, if not more important to have low costs of operation. Having a low underlying cost helps ensure that you are not undercut by a different firm that is able to achieve a low cost of operations. While it is possible to obtain the low price position momentarily by undercutting rivals, unless you actually have low costs of operations, other firms may be able to further undercut.
What it takes to be a cost-leader
Achieving cost leadership requires dedication – you need a mindset that prioritizes cost leadership. Unless you are focused on reducing costs throughout all areas of your operations, then you risk getting undercut by other firms more dedicated to reducing costs from the operations. When faced with the choice between a feature that will add additional costs to the oppositions, true cost-leaders will opt for the low-cost approach, recognizing this is the primary reason why customers buy the product.
Examples of approaches to cost-leadership
Some key examples of approaches to cost-leadership include:
- Economies of scale: Where increased production volumes lead to lower costs
- Economies of scope: Where operating in different areas can lead to reduced overall costs
- Product design: Products that are designed for lower manufacturing costs.
- Reduced product features: Savings by scrapping certain attributes of the product
- More efficient operations: Identifying more efficient approaches to the overall production process
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