Cost Leadership Strategy

Faced with a world economy like the current one, with so much competition, companies seek as a goal a competitive advantage, which are generally based on cost leadership, which allows the company to offer products or services at the lowest cost in the market.

The challenge of the cost leadership strategy, consists of obtaining a convenient benefit for the company and moving the cost effectiveness of the different market players.

What is a cost leadership strategy?

They are those strategies with which products similar to those of other companies are offered at a lower cost, that is In other words, a certain company considers being the lowest-cost producer in its industrial sector in order to achieve a differentiation.

At lower prices than rivals, the leader's position translates into higher returns, however, standard products should not be sold ignoring the bases of differentiation of the product itself, since, if the customer does not perceive the product as comparable, the company will have to set very low prices in relation to the competition to reach sales.

The sources to obtain this type of advantages are varied and depend on the structure of the own industrial sector, includes economies of scale, the use of own technology, preferential access to the raw material, among other.

The cost leadership strategy intends for one company to be the leader, rather than several companies struggling to achieve that position, as this implies rivalry and tough competition that can bring unfavorable consequences for all.

Variables to consider in the cost leadership strategy

This strategy seeks or aims to reduce costs, for this it must bear in mind the analysis of elements and variables such as:

• The costs of materials and raw materials: It is achieved by diversifying the raw material, acquisition of imported raw materials at a lower cost, establishment of stable relationships with suppliers, etc.
• Improvement or modernization of production techniques: In such a way that the efficient use of raw materials, increase in quality and use and minimization of waste in the different stages of the productive process.
• Adaptation of the product design to international parameters, that reduce costs, that obtain competitive advantages.
• The innovative capacity and increased skills to achieve the desired competitiveness and not stay with a product at a lower price without achieving sales.
• Economies of scale, specialization that allows the company to achieve an optimal level of production and continue to produce more at a lower cost. That is, production increases and the cost per unit is reduced.
• Cost sharing with other businesses (Industrial dumping).
• Optimization and adequate use of the installed capacity, which allows the maximum use of the productive potential during a determined period of time.
• The relationship Fixed costs-Variable costs, in order to control the final cost of the product.

Advantages of the cost leadership strategy

Working with reduced costs, allows the company:

• Achieve higher sales volume.
• Obtain higher profit margins.
• Sustain and endure price wars between the competition.
• Undertake various pricing policies, since a company that achieves success with this strategy is due because it has lower costs, allowing you to aggressively lower prices to eliminate the competence.

Disadvantages of the cost leadership strategy

The company employs this strategy, has established the production of certain products, with certain processes specialized, which reduces the flexibility of the company when it comes to having to adapt to changes in demand or technology.

In this sense of cost reduction, the company does not worry about activities such as research and development.