Cost Leadership
Cost leadership is the ability to produce and provide a product or service at the lowest cost in the market (Porter, 1985). This can be achieved through careful design of the value chain. At each step in the value chain the organization needs to ensure that it is sourcing materials from the least expensive providers. The organization then needs to ensure that the production processes are efficient and cost effective so that production costs remain low. Shipping and logistics need to also be tightly controlled in order to ensure cost savings. Lastly the retail or fulfillment sector will likely be self-service or low-service so as not to incur service costs.
Some of the ways that cost leadership can be achieved is through economies of scale. Larger firms can produce more of a single product for a smaller per unit cost than smaller firms.
Another strategy to achieve cost leadership is to control many aspects of your supply chain. This could mean access to raw materials and making it harder for competitors to access these resources.
Cost leadership is an attractive strategy to those firms that have a firm grip on their supply chains. It is also an easy strategy to explain to customers. Most customers will find the low price to be a powerful incentive to purchase a product. In addition customers will have lower expectations for the quality of the item and consider this a logical consequence for the lower price.
Example of cost leadership
Some of the ways that cost leadership can be achieved is through economies of scale. Larger firms can produce more of a single product for a smaller per unit cost than smaller firms.
Another strategy to achieve cost leadership is to control many aspects of your supply chain. This could mean access to raw materials and making it harder for competitors to access these resources.
Cost leadership is an attractive strategy to those firms that have a firm grip on their supply chains. It is also an easy strategy to explain to customers. Most customers will find the low price to be a powerful incentive to purchase a product. In addition customers will have lower expectations for the quality of the item and consider this a logical consequence for the lower price.
Example of cost leadership