Following on from the Generic Business Strategies - Overview, lets look at a cost leadership strategy.
In a cost leadership strategy one aims to keep costs low in order to be able to sell your product/service as a very competitive price. In some cases it may not be the lowest price in the market but best value for money options in the market, this is known as best cost. Companies can achieve these low costs my investing in technologies to drive down costs and also by reaching economies of scale as the low price should drive an increase in demand. An example of investing is technology is UPS investing in software to plan routes for its delivery vehicles that is saving it over 5.5 million litres of fuel per year. Walmart has significant power over its suppliers as it is the largest customers to many of them, thus benefiting from its economies of scale.
Some of the risks a cost leadership strategy can encounter are the following:
- being undercut by other competitors
- Increase in input costs
Some people view a cost leadership strategy as being cheap and do not want to run a business based on price. There may be cases where a cost leadership strategy is not appropriate, however avoiding it because of not wanting to be cheap can mean losses/no/slower growth than you could have achieved if it was the correct strategy. Walmart and Amazon and two examples of companies who have succeeded greatly based on a cost leadership strategy. In South Africa Takealot is following that route.
Please complete our short survey on cost leadership strategies.