Elements Of Cost Leadership Strategy

COST LEADERSHIP STRATEGY

• MEANING:

Cost leadership is a type of business strategy which is the lowest cost of operation in the industry. This strategy is often driven by company efficiency which is a level of performance using lowest amount of inputs to create the greatest amount of outputs, size which includes the measurement. It aims to make use of the following: scale of production, well defined scope and other economies producing highly standardized products using high technology.

• SOURCES OF COST LEADERSHIP STRATEGY:

1. Economies of Scale:

One of the most important sources of cost advantage for a firm is its size of the business. There is a relationship between firm size measured in terms of volume of production - and costs - measured

Policy changes:

In general firms, the attempt to implement a cost-leadership strategy will choose to produce relatively simple standardized products that sell for relatively low prices compared to the products and prices of firms pursuing other business or corporate strategies.

• FIVE FORCES MODEL OF COST LEADERSHIP STRATEGY

1. Threat of Entry :

If an existing firm is a cost leader, the new entrants in the market may have to invest heavily to reduce their costs prior to entry. Generally, new entrants will enter using other business strategies like differentiation, alliance etc. rather than attempting to compete on costs.

2. Threat of Rivalry : This model is reduced through selections of pricing strategies such as:

• The cost-leader can set its price similar to the price of higher-cost competitors so that, it reduces the chance that competitors will imitate the low-cost firm. However, keeping prices similar to a competitor's prices is an expense to the market share than sales volume. Therefore at this competitive price, the cost-leader firm earns a reasonable

Differentiation can be attained through competitive pricing, improvements to functional design or features distribution timing, expanded distribution channels, brand reputation etc.

• TYPES OF PRODUCT DIFFERENTIATION:

There are three types of product differentiation:

1. Simple: These products are differentiated based on a variety of features.

2. Horizontal: This type of products is differentiated based on a single characteristic, but consumers are not clear on which product is of higher and sophisticated quality.

3. Vertical: These products are differentiated based on single features and consumers are clear on which product is of higher quality.

• SCOPE OF DIFFERENTIATION STRATEGY:

1. Creates value:

When a company uses a differentiation strategy that focuses on the cost value of the product versus other similar products on the market, it creates a real value among consumers and potential customers. A strategy that emphases the value highlights of cost savings or durability of a product in comparison to other