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Cost leadership strategy is often marked as an essential lower-cost strategy in the manufacturing industry. The main focus of this strategy lies in achieving the pricing and not with leadership. Furthermore, a particular cost leader tends to gain a high-end competitive advantage compared with low-cost and other organizations. The cost leadership strategy can be achieved by underpricing the competitors and reaching a prominent market share to earn a more significant profit after selling the shares at competitive market rates.
Benefits of Cost Leadership Strategies:
There are many benefits of cost leadership strategies. This is a great gain for a company as low cost is evident in bringing an organization above-average returns from competitive businesses. It is hard to beat organizations based upon the cost needed.
The cost leadership strategy is also used to force the high-end market to lower their rates. Furthermore, the cost leadership strategy will handle cost increases in market value. Finally, a cost leadership strategy is the most vibrant strategy as it allows the company to be in a higher position against its competitors.
Types of Cost Leadership Strategies
Porter’s strategies provide a great way to gain an advantage as they aid in developing a particular brand’s sales and market value. Cost leadership strategy helps in maintaining the organization and eliminating its competitors in the market. However, to achieve this strategy, there are two main ways to develop and execute a Cost leadership strategy:
-Charging usual average industry prices, but increasing profits by decreasing costs.
– Second, to increase market value by decreasing overall prices and making profits on every sale after the cost reduction.
Methods to achieve Cost leadership Strategies.
Cost leadership strategy is a fundamental principle strategy that states the number of production per unit. If there are more units, the unitary cost will decrease. However, it resists production and sale by having a show of high synchronization. Successful cost leadership strategies allow the company to generate more revenue and sell more units and at a lower margin rate.
The below-mentioned specific cost leadership strategies are highlighted, enabling an organization to gain the upper hand and establish its success rates.
Economies of scale:
This is known to decrease production costs by implementing efficient output. In this theory, the organization’s main impact is that of an organization’s size as the lower its value, the more it’s extensive.
Advantages of size:
This idea solely depends upon the money given to suppliers, as this exhibits increasing the extraction of notable deals in the market. This shows the importance of increased purchasing power.
Technology:
This method highlights increasing the supply of innovative technology to be used for better production methods that result in cutting various costs. This shows that a technology used in business explains its chances of staying in the long run.
Focus:
The central point in the series is that of a company’s ability to manage the production with complete guide and efficiency. As stated, it is not essential for a company to be extravagantly huge to become a vast leader. In short, it is necessary to maintain focus and efficiency to gain higher chances of becoming a cost leader in the domain.
Raw materials:
One of the most critical strategies to reduce the cost rate is its control over its raw material production. In short, other companies can tend to pay a lot for raw material, while others utilizes its resources and reduces the money spent. In other words, the more an organization has access to raw material, the more it is about keeping the costs.
Operating efficiency:
This strategy means getting several tasks done in lesser time. This way, the costs are reduced. Similarly, the company’s efficiency has also increased. It is evident that the less time an organization spends on the production and their tasks, the lesser the cost consumption, thus making the company an effective cost-advantaged company.
If companies implement some of these strategies, there will be more available chances as cost leadership has become more comfortable and legally enforceable.
Examples of Cost Leadership Strategy:
However, individual customers believe that the lower the cost of a product, the lower the quality, which is usually not the case as specific organizations believe in maintaining the rates and becoming the cost leaders in the market.
One of the most significant examples is Walmart, the largest retail company in the world. Studies have shown that they have maintained their prices and utilize the cost leadership theory to keep their prices low. Walmart lowered its operating cost significantly by eliminating its in-house costing by traveling in economy flights than first-class and sharing hotel rooms. Furthermore, employees are said to use minimal prices when cooling or heating buildings. The employees are also kept on lower wages and are provided with less health insurance.
Furthermore, an organization like payless is famous for this kind of strategy. They try to limit the number of employees and insurance policies and serve them to cut all sorts of operational costs. Their slogan suggests that they offer profitable quality brands at affordable prices than their competitors. This cost-cutting strategy enables them to provide a wide range of products and services at very reasonable prices.
One of the most prominent food chains, McDonald’s, applies the cost leadership theory by practicing the divisional theories by recruiting the staff and employees inexperienced and require training as usually they are recruited on a fundamental salary package reduces the in-house costs for them. This allows them to manage their costs and gain a higher number of audiences.