Strategic Management - Cost Leadership (2024)

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Cost leadership, a concept by Michael Porter, illustrates a method to affirm and manage the competitive advantage. Cost leadership, basically, refers to the lowest cost of operation in the industry.

The cost leadership is a result of company efficiency, size, scale, scope and accumulated experience (the learning curve). A cost leadership strategy aims to utilize scale of production, well defined scope and other economies such as a good purchasing strategy, producing highly standardized products, and using modern and current technologies.

In the recent years, an increasing number of companies have chosen a strategic mix to attain market leadership. These mixed patterns consider simultaneous effects of cost leadership, superior customer service and product leadership.

Price leadership is a different concept. A company may become lowest cost producer, yet not the cost leader. A company can have a higher than average profitability in case of price leadership. The cost leaders do not compete only on price and are very effective in competition, having a low cost structure and management.

Examples

Ikea − The Swedish company, Ikea, has revolutionized the furniture industry. Ikea sources its products in low-wage countries and offers basic level of service. Ikea does not assemble or deliver furniture. While this is a bit more complex than traditional retailers, it allows Ikea to offer lower prices and attain cost leadership.

Wal-Mart − Wal-Mart Stores, Inc. has a strategy of everyday low prices to attract customers. The idea of everyday low prices is to consistently offer products at an attractively cheaper rate than competitors, rather than depending only on sales. Wal-Mart has a large scale and efficient supply chain. They also source products from cheaper yet better domestic suppliers and from the low-wage foreign markets. Therefore, the company can sell their items at low prices, profiting off thin margins but high volume.

McDonald's − The restaurant industry runs on low margins where it is difficult to compete with a cost leadership marketing strategy. McDonald's has a strategy of offering basic fast-food meals at low prices. They have a division of labor that allows it to recruit and train freshers rather than trained cooks. It also relies on few managers. These savings in various processes allow the company to offer its foods for bargain prices. McDonald’s, the global restaurant chain, uses a distinctive hiring strategy to be the cost leader.

Southwest Airlines − The airline industry profits come from charging high ticket prices. Southwest Airlines challenged this concept by marketing itself as a cost leader. Southwest offers the lowest prices possible by being more efficient in its operations. They minimize time planes spend on the tarmac in order to keep them flying and to keep profits up. They also offer less thrills to customers, but is able to pass the cost savings.