Overall Cost Leadership
Cost leadership refers to the absolute lowest cost of manufacture in the industry. The reference is to cost, not price, leadership. Cost leadership involves achieving competitive advantage through overall lowest cost compared to other firms in the market. The aim is to open up a sustainable cost advantage over competitors and the use lower cost as a basic for either underpricing competitors and gaining market share at their expense or earning a higher profit margin selling at the going price.
A firm could be the lowest cost producer strategies. This strategy - "a set of functional policies aimed at ... "
"requires aggressive construction of efficient scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control, avoidance of marginal customer accounts, and cost minimization in areas like R&D, service, sales force, advertising, and so on. ...
Low cost relative to competitors becomes the theme running through the entire strategy, though quality, service, and other areas cannot be ignored" (Michael E. Porter ).
There are a number of reasons why a cost leadership strategy can be attractive:
- Having a low-cost position yields the firm above- average returns in its industry despite the presence of strong competitive forces.
- It can defend the firm against rivalry from competitors because it is difficult for competitors to force the firm out on the basis of price.
- A low-cost position can defend the firm against powerful buyers because buyers can exert pressure only to drive prices down to the level of the next most efficient competitors.
- It can provide a defense against powerful suppliers by providing more flexibility to cope with input cost increases.
- The factors that lead to a low-cost position usually provide substantial barriers to entry in terms of scale economies or cost advantages.
- It usually places the firm in a favorable position against substitutes relative to its competitors in the industry.