Low Cost Leadership Strategy

Cost leadership is the most intelligible of the three generic strategies. By choosing this strategy, the firm attempts to become the low-cost producer in the industry. Low-cost producers commonly sell a standard product and place emphasis on acquiring scale or absolute cost advantages from all possible origins. A low-cost producer must identify all potential sources of cost advantage and use them. The pursuit of low cost leadership generic strategy begins with a careful cost analysis that examines the value activities performed by a firm. Each value activity should be considered separately for the cost analysis to provide relevant and accurate results. This is due to the fact that each value activity has a cost structure of its own. Relation with other activities, both internal and external, may impact this cost structure. A firm secures cost advantage if the aggregate cost of value activities is lower than the aggregate cost of value activities of competitors.
MORE – P. 64-70 ABOUT VALUE CHAIN AND COST ANALYSIS

The cost position of a firm is construed as a by-product of the cost behavior of its value activities. Factors that influence cost behavior or value activities are called cost drivers.
As stated by Porter (2004, p. 70) “ten major cost drivers determine the cost behavior of value activities: economies of scale,

Failing to realize this is a big strategic mistake. If many companies have ambitions to become the cost leader, the level of rivalry becomes very high. Firms battle for every piece of market share. The repercussions of this can be ruinous for profitability and industry structure. Cost leadership is therefore a strategy heavily reliant on market seizure and supremacy, excepting the discovery of a major technological change that makes an allowance for a profound change in the cost