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Sunday, June 6, 2010

Cost Leadership Strategy

Low cost producer strategy calls for a company to sell its products either an average selling price to earn a profit higher than rivals, or below the average industry prices to gain market share.  The cost leadership strategy usually targets a broad market.

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.
“To reduce costs or comply 'on the cheap,' some companies make different products for different regions — according to regional environmental requirements — or make them to just barely meet current minimum requirements. But the least-expensive strategy for most global producers will be to design, manufacture, and manage all products to the highest environmental standards.” - Pamela Gordon

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.