A company acquires cost advantages by improving process efficiencies, gaining unique access to a large source of lower cost materials, making optimal outsourcing and vertical integration decisions, or cost avoidance. If a competing firm does not have the ability to also lower costs it creates competitive advantage.
Firms that succeed in cost leadership have the following strengths:
- Capital investment ability creating a barrier to entry for competing firms.
- Efficient manufacturing design skills that may shorten the production process.
- High level of expertise in manufacturing process engineering.
- Efficient distribution channels.
The risk in the low cost strategy is other companies have the ability to also lower costs and market share is challenged. Quality can be the difference maker in a low cost strategy.
“Almost all quality improvement comes via simplification of design, manufacturing... layout, processes, and procedures.” - Tom Peters
To compete globally a company must relentlessly drive out costs while maintaining world class quality and environmental practices.