Cost Leadership Strategy – Explained! Case Study, History, Characteristics, Pros & Cons

The word leadership can be traced back to an Old English word ‘laedere,’ which means a person has the power to lead. For example, when a group of people is working under a company or organization and trying to achieve a larger goal, the organization appoints some people known as leaders to the group members to guide them in the right direction so that they don’t go astray.

Managing a large group requires a leader with different characteristics, such as a charismatic leader, a democratic leader, and a bureaucratic leader who possess specific strategies for managing the company. Various technique of producing high-quality products at low cost is known as a cost leadership strategy.

Cost Leadership Strategy – Meaning

Cost leadership strategy refers to specific sets of strategies, which signifies good quality product production at the lowest cost. It is only possible by a leader who develops a system and makes the appropriate towards low-cost manufacturing. Any organization or product manufacturing company usually aims to produce good quality products at low cost.

In that case, such companies hire different personalities having the ability to lead and produce such low-cost goods or products. As a result, an individual who makes the direction for making low-cost manufacturing processes within the company is known as the cost-efficient leader. Hence, such obtaining strategy is known as a cost leadership strategy.

Historical Background –

The economic theorist and expert in strategic management Michael Porter proposed the cost leadership theory. He also developed a focus and differentiation strategy. According to Porter’s view, dominance brings about increased earnings. When a corporation has a broader moat, a larger market share, and a more vital ability to squeeze profits out of competitors, suppliers, and customers, that company has a higher competitive advantage.

Walmart is perhaps the most well-known example of cost leadership because the company pioneered the use of cost leadership as a business strategy. As a result, it is now the largest corporation in the world. Customers considering shopping at Walmart are made aware of the company’s focus on providing low prices with advertisement catchphrases like “Save Money. Live Better” and “Always Low Prices.”

Characteristics of Cost Leadership Strategy:-

A low-cost manufacturing strategy is a vital strategic approach for any company. However, some critical characteristics of this technique are –

• This leadership approach brings the economic development of a company or organization, which helps to ensure that the company is well aware of its annual costs and how to reduce them
• Since the product manufactured is very cost-efficient; hence it attracts the customers
• As it is very cost-effective so the company can use such unused funds in various operational approaches
• It can be added to maintain the proper quality of products or goods produced at a low cost

Advantages of Cost Leadership Strategy:-

The advantages of any company tending to reduce costs in producing good quality products are –

• Leaders who offer cost efficiency always put numerous facilities within their price. Such an attitude of do not compromise on quality makes this leadership extremely special
• The nature of cost efficiency creates a separate unique selling point for customer’s minds
• Companies producing low-cost advanced products have a higher rate of competition than companies producing high-value products
• Companies with low-cost leadership are competitively more profitable than other companies or organizations because they avoid unnecessary expenses

Disadvantages of Cost Leadership Strategy:-

Cost leaders and top executives of the company or organization should also aim to maintain the company’s reputation by producing high-quality products or products at low cost. However, some disadvantages can be noticed in this case, and they are-

● An organization is formed with more than one member. Since the goals of all of them are not the same, and as a result, the products’ quality often varies.

● If the cost leaders focus only on cost reduction without keeping up with the investment required for the company’s production, then that particular company or organization can face tremendous losses

● Sometimes cost leaders are so committed to reducing the cost of running a company or organization that they cannot consistently maintain loyalty with their customers

● Unnecessary cost-cutting in manufacturing may affect consumer preferences

How to implement it?

The ability to sell wares at a reduced price makes a business more competitive. The key is to create a cost leadership plan.

1. The ability to produce on a larger scale
2. Introducing cutting-edge technologies
3. Sourcing essential resources
4. Boosting productivity

Though it may seem difficult initially, cost leadership is theoretically attainable in every business model. The final aim is to develop a cost leadership strategy that stands out from the crowd and proves to be more effective than the competition.

If the production of any goods increases, the manufacturing cost will significantly be reduced, making cost leadership a strategy based on economies of scale. By using economies of scale and modern technology, this method ensures that all products are uniformly manufactured.

Because of this, businesses can increase their unit sales while maintaining a smaller profit margin per item by adopting a cost leadership approach.

To get a high-profit margin, however, businesses must take the right steps and adopt a cost leadership approach. Instead, they must commit to seeing the process through to completion or risk falling more and farther behind the competition.

The following are a few tried and tested methods by which businesses have achieved cost leadership in their different organizational structures. With this tactic, a company produces goods that meet the needs of a specific demographic of buyers at a price that is significantly lower than the market average or competitive.

This leadership style mainly refers to incorporating the cost-efficient product in their business operations which leads to a unique selling point for the organization.

There are two main methods in which this occurs: Pricing at or near cost to expand market share. As a result, the company’s image is elevated while sales are boosted by positioning itself as an affordable alternative. Following these seven guidelines can help you become a more effective leader in your firm.

It’s essential to:

• Think and behave positively;
• Demonstrate empathy in the workplace;
• Put your company’s culture into practice modestly; and
• Have excellent communication skills.
• Acquire a command of strategy and diplomacy

Cost Leadership Strategy – Case Study

When discussing cost leadership, one of the popular examples is Ryan Air, the owner of Irish low-cost airlines. This organization offers domestic and global services and has more than 450 aircraft.

As a competitive advantage strategy, the corporation strives to undercut rivals by offering its customers cheap flights. To this end, the corporation employs many techniques, including exerting significant bargaining leverage over suppliers, which helps keep operational expenses low.

There is a deficiency of unique services like loyalty programs, complimentary meals, and beverages, in-flight entertainment, airport lounges, premium cabins, etc.,

Though this is not the case which gives them bargaining strength with airport operators and allows them to fly to less popular airports and demand lower landing and handling fees, customers looking to save money will appreciate the company’s competitive advantage plan.

Conclusion –

Cost leadership mainly refers to a strategic approach taken by a leader which ensures cost-efficient products marketed or manufactured by an organization. Most importantly, this leadership has particular potential, like not using unnecessary pricing standards without compromising the quality of a product. Sometimes, cost efficiency affects the features as well. Therefore, such a contradiction might negatively impact o the business; otherwise, it is a great approach.