In
business strategy, cost leadership is establishing a
competitive advantage by having the lowest
cost of operation
The cost of operation is the business strategy implemented in many companies to gain a huge market. The cost of operation is the cost acquired in completing one operation. It may be a conversion of inputs into the outputs or labor costs etc. If ...
in the industry.
Cost leadership is often driven by company
efficiency
Efficiency is the often measurable ability to avoid wasting materials, energy, efforts, money, and time in doing something or in producing a desired result. In a more general sense, it is the ability to do things well, successfully, and without ...
, size, scale, scope and cumulative experience (
learning curve
A learning curve is a graphical representation of the relationship between how Skill, proficient people are at a task and the amount of experience they have. Proficiency (measured on the vertical axis) usually increases with increased experience ...
).
A ''cost leadership strategy'' aims to exploit scale of production, well-defined scope and other economies (e.g., a good
purchasing approach), producing highly standardized products, using advanced technology.
In recent years, more and more companies have chosen a strategic mix to achieve
market leadership. These patterns consist of simultaneous cost leadership, superior
customer service and
product leadership
Product may refer to:
Business
* Product (business), an item that serves as a solution to a specific consumer problem.
* Product (project management), a deliverable or set of deliverables that contribute to a business solution
Mathematics
* Prod ...
. Walmart has succeeded across the world due to its cost leadership strategy. The company has cut down on excesses at every point of production and thus are able to provide the consumers with quality products at low prices.
Cost leadership is different from
price leadership
Tacit collusion is a collusion between competitors, which do not explicitly exchange information and achieving an agreement about coordination of conduct. There are two types of tacit collusion - concerted action and conscious parallelism. In a ...
. A company could be the lowest cost producer yet not offer the lowest-priced products or services. If so, that company would have a higher than average
profitability. However, cost leader companies do compete on
price and are very effective at such a form of competition, having a low cost structure and management.
[
The concept of cost leadership was developed by Michael Porter.
]
References
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Strategic management