Cost Leadership

Posted in Marketing and Strategy Terms, Total Reads: 2231
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Definition: Cost Leadership

Cost leadership is a business strategy wherein a business firm tries to become the market leader by operating at the lowest cost amongst all the firms in business. This strategy was developed by Michael Porter as one of the strategies for gaining competitive advantage in the market.

Cost leadership strategy requires a firm to lower its operational cost to such levels that no other firm can match. This would help the firm to either increase its market share by supplying products at the lowest price to customers or increasing its profitability.

There may be three ways of becoming the cost leader:-

  • High asset turnover- High asset turnover would mean quick services in service industries (like restaurants). In manufacturing industries, it would mean producing high volumes of output so as to produce economies of scale, derive benefit of learning curve and spread fixed costs over large volumes of output.
  • Low direct and indirect operating costs- By standardization of operations
  • Proper inventory and supply chain management-Bulk buying, Just In Time inventory, working with vendors for proper procurement of raw materials and distribution of products.

Cost leadership strategy has made firms like Walmart an undisputed leader of the market.

The only problem that might accrue with cost leadership strategy is that customers might start associating low cost with low quality.


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