Essentially, a firm that follows a cost leadership strategy attempts to earn higher returns and competitive advantages through offering products or services at the lowest prices in the industry. Cost leadership is one of three generic business strategies discussed by porter in his wellknown book, competitive strategy1980. This approach can leave the leaders rivals with little choice but to. Strategic management cost leadership tutorialspoint. Types of strategies cost leadership,differentiation, focus. The company uses only boeing 737s in its fleet rather than a variety of aircraft, which reduces the training needed for pilots, crews and mechanics. You must be able to achieve a large volume of sales, while applying operational scaling, before you run out of money. Vecchio, 1988 leadership is the influential increment over and above mechanical compliance with the routine directives of the organization. A few years ago one of us was asked to write the preface to a book of readings on leadership. The global online retailer operates with a razor thin profit margin and succeeds due to a combination of economies of scale, innovation of various business processes and a. Pdf do cost leadership strategy and process innovation. Types of strategies cost leadership,differentiation, focus strategies the term strategy has been adapted from war and is being increasingly used in business to reflect broad overall objectives and policies of an enterprise.
Cost leadership, a concept by michael porter, illustrates a method to affirm and manage the competitive advantage. In business strategy, cost leadership is establishing a competitive advantage by having the lowest cost of operation in the industry. Leadership and management in tqm and excellent organizations total quality management is a philosophy based on a set of principles, as customer focus, continuous improvement, everyones involvement and management by fact. Amazon business strategy can be described as cost leadership taken to the extreme. Cost leadership is the strategy that focuses on making the operations more efficient and cutting costs wherever possible. Cost leadership, basically, refers to the lowest cost of operation in the industry. Price leadership is when a firm that is the leader in its sector determines the price of goods or services.
The most revolutionary development in the american automobile market then was the popularity of the closedbody cars sloan, 1972, pp. In the case of cost leadership, one advantage is that cost leaders emphasis on efficiency makes them well positioned to withstand price competition from rivals table 5. Focused cost leadership a generic business strategy that requires competing based on price to target a narrow market. The study sought to answer the following research questions.
To achieve cost leadership, southwest targets efficiency. Cost leadership and competitive advantage your business. Cost leadership styles present organizations with a makeitorbreakit gamble. This could mean having the lowest perunit cost among rivals in highly competitive industries, in which case returns or profits will be low but nonetheless higher than competitors. Cost leadership theory is a practice of lowering operating costs to be able to offer lower prices than ones competitors. The study focuses on cost leadership strategy and sustainable competitive advantage of naivas supermarket chain in kenya. Cost leadership is one of the three viable basic types of competitive advantage according to michael porter achieving a low cost strategy means that a firm sets out to become the low cost producer in its industry. Cost leadership is a strategy that companies use to achieve competitive advantage by creating a lowcostposition among its competitors. Michael porters generic cost leadership strategy explained. Cost leadership refers to provide lowest cost of operation in the industry and it is different from price leadership. Strategy used by businesses to create a low cost of operation within their niche.
Cost leadership is a business strategy wherein a business firm tries to become the market leader by operating at the lowest cost amongst all the firms in business. It is difficult to deploy the strategy because the management must constantly work on reducing cost at every level to remain competitive. However, at best, these easy solutions are fairly useless in practice, and can be harmful and misleading gemmil and oakley, 1992. It may result from scalescope efficiencies, tight overhead control, careful selection of customers, standardization and automation. Cost leadership definition marketing dictionary mba. Cost leadership strategy is also known as lowcost provider strategy, or simply lowcost strategy. Leaders carry out this process by applying their leadership knowledge and skills.
Cost focus is low cost, but only selling to a narrow segment of the market. The cost leadership is a result of company efficiency, size, scale, scope and accumulated experience the learning curve. In other words, its a companys ability to maintain lower prices than its competitors by increasing productivity and efficiency, eliminating waste, or controlling costs. Cost leadership strategy takes place through experience, investment in production facilities, conservation and careful monitoring on the total operating costs through programs such as reducing the size and. Focused cost leadership and focused differentiation. Low cost leadership strategies enable an organization to develop standardized products in large volume at low cost, which give that organization a competitive edge over the competitors in the market.
Cost leadership, differentiation, focus flashcards quizlet. To better understand the current state of cost leader ship within organizations and identify areas for improvement, i recently conducted a survey of 120 financial executives. Cost leadership is a concept developed by michael porter, used in business strategy which describes a way to establish a competitive advantage. This post focuses on cost leadership because its the strategy that relates tangentially to it and the concept of globalization. The primary objective of a firm aiming to attain cost leadership is to become the lowest cost producer in comparison to the. The company that follows this strategy intends to become the overall lowcost provider in the. A firm that follows this strategy does not necessarily charge the lowest prices in the industry. A more natural approach would be focus differentiation because focusing allow you to get really good at servicing that segment so that should allow you to differentiate and put your prices up. Since that time, some commentators have made a distinction between cost leadership, that is, low cost strategies, and best cost strategies. Literally speaking, the term strategy stands for the warart of the military general, compelling the enemy to fight as per. This strategy was developed by michael porter as one of the strategies for gaining competitive advantage in the market. Bennis leadership is the incremental influence that a person has beyond his or her formal authority. Cost leadership is about organizing all your resources around producing goods and services at the lowest cost possible. Cost leadership aims at having the lowest costs in a market.
Building a sustainable cost leadership culture within a company reduces that behavior and enables success. Kmarts illfated attempt to engage walmart in a price war ended in disaster, in part because walmart was so efficient in its. A costleadership strategy is a broad approach to business whereby a significant aspect of a companys strategy is an effort to operate as the lowestcost business in its industry. To gain competitive advantage, small businesses can focus on different strategies, including leadership in cost, quality, innovation or customer service. Costleadership is among several general business strategies developed by author and wellknown business management guru michael porter. Porters generic strategies cost leadership strategy. A critique of porters cost leadership and differentiation. Cost leadership strategy the purpose of this strategy is the companys lowcost products offers in an industry.
Leadership is the capacity to translat e vision into reality. Cost leadership is a term used when a company projects itself as the cheapest manufacturer or provider of a particular product or commodity in a competition. If the leadership is unable to achieve sustainability before their capital reserves are depleted, then there is a good chance that the company could. A common aphorism is that you cant please everybody, and this is particularly true in leadership. The various leadership authors had written articles on far ranging topics such as trust, authenticity, servant leaders, toughminded leaders. What is the influence of cost leadership on the competitiveness of boc kenya. Its often driven by organization efficiency, size, scale, scope, technology and experience. A read is counted each time someone views a publication summary such as the title, abstract, and list of authors, clicks on a figure, or views or downloads the fulltext.
Range, price and convenience are placed at the core of amazon competitive advantage. Cost leadership is often driven by company efficiency, size, scale, scope and cumulative experience learning curve. Strongest advantage comes through leadership in a factor that is important to customers and difficult for competitors to. A focused cost leadership strategy requires competing based on price to target a narrow market figure 5. Many are willing to accept the benefits and perks that come with leadership, but few are willing to accept the true cost of being a leader. Cost leadership strategy significantly related to or ganizational performance t able 5, cost leadership significantly related to process in novation t able 3 and in the final step of multiple. The editor asked that the preface integrate the chapters in the book into a cohesive whole.
We will use the term low cost strategy in this book. The use of this strategy is primarily to gain an advantage over competitors by reducing operation costs below that of others in the same industry. Information and translations of cost leadership in the most comprehensive dictionary definitions resource on the web. In addition, practical conceptions and applications of the incompatibility of strategies practice will be examined as a complement to the literature base theory in order to shed some light on the relationship between theory and practice. This strategy is especially beneficial in a market where the price is an important factor. A focused cost leadership strategy requires competing based on price to target a narrow market table 5. The cost leadership strategy and value chain are both concepts developed by author and business management expert michael porter. They claim that a low cost strategy is rarely able to provide a sustainable competitive advantage.
A critique of porters cost leadership and differentiation strategies 40 strategy can bring about in gaining a low cost position, as porter 1985, p. A cost leadership strategy aims to exploit scale of production, welldefined scope and other economies e. When products are manufactured in bulk, the cost of production reduces, which facilitate the organization to keep the prices of its products low. Cost leadership strategy and sustainable competitive. Cost leadership is a strategy that companies use to achieve competitive advantage by creating a low cost position among its competitors. It helps the organization create competitive advantage. Perhaps an example from the holiday market would work. Cost leadership strategy the purpose of this strategy is the companys low cost products offers in an industry. As it workers are aware, the forces of globalization have no mercy in their enablement of companies to offshore work in an attempt to lower costs. Cost leadership is the mechanism of establishing a competitive advantage by having the lowest cost of operation in the industry. The purpose of this study was to determine the influence of cost leadership, differentiation and focus strategies on competitiveness of boc kenya. Differentiation strategy is an approach that a business takes to develop a unique product or service that customers will find better than, or in another way distinctive from, products or. Focused cost leadership is the first of two focus strategies. The cost leadership strategy is one of the socalled porters generic strategies, and the value chain, outlined in porters 1985 book competitive advantage, is a series of events companies undertake that add value.