Cost Leadership Strategy /

Low-cost Business Strategy

Prof. (Dr.) Nitin Zaware

Prof.(Dr.) Nitin Zaware 1

Cost Leadership / Low-Cost Business
Strategy:
The concept of generic strategies for gaining
competitive advantage has received considerable
attention recently in the business policy field.
Competitive Strategy, a modern classic of business
thinking, provides a strong conceptual foundation for
developing corporate strategy.
Generic competitive strategies are the marketing
strategy any of three strategies for marketing products
or services: cost leadership, differentiation, and focus.
The cost leadership strategy implies supplying
products in a more cost-effective way than competitors
do.
Prof.(Dr.) Nitin Zaware 2
 Cost Leadership / Low-cost Business Strategy:
A cost leadership strategy is an integrated set of
actions designed to produce or deliver goods or
services at the lowest cost, relative to that of
competitors, with features that are acceptable to
customers.
Achieving Cost Leadership :

Aiming at Use of Cost

Demand Economies of Differentiation
Standardization Average Saving
Forecasting Scale Withholding
Customer Technologies

Prof.(Dr.) Nitin Zaware 3

Achieving Cost Leadership :
1) Demand Forecasting :
Accurate demand forecasting and high capacity utilization is
to be done to realize cost advantages.
2) Economies of Scale :
Economies of scale are to be attained. They lead to lower
per unit cost of product or service.
3) Standardization :
High level of standardization of products is needed. Uniform
service packages can be offered. Mass production
techniques are to be used. All this yields lower per unit
costs.

Prof.(Dr.) Nitin Zaware 4

Achieving Cost Leadership :
4) Aiming at Average Customer :
Aiming at the average customer makes it possible to offer a
generalized set of utilities in a product /service to cover a
greater number of customers.
5) Use of Cost Saving Technologies :
Investments in cost-saving technologies can help a firm to
squeeze every extra paisa out of the cost, making the product
/service competitive in the market.
6) Differentiation Withholding :
Withholding differentiation till it becomes absolutely necessary
is another way to realize cost-based competitiveness.

Prof.(Dr.) Nitin Zaware 5

Benefits of Cost Leadership Strategy:

Cost Advantage

Capacity to Absorb Increased Price

Price Reduction

Minimizes Threat

Effective Entry Barrier

Prof.(Dr.) Nitin Zaware 6

Benefits of Cost Leadership Strategy:
1) Cost Advantage :
A firm is protected against the ill effects of competition if it has a
lower-cost structure for its products and services.
2) Capacity to Absorb Increased Price :
Powerful suppliers possess a higher bargaining power to
negotiate price increase for inputs.
3) Price Reduction :
Powerful buyers possess a higher bargaining power to effect
price reduction.

Prof.(Dr.) Nitin Zaware 7

Benefits of Cost Leadership Strategy:
4) Minimizes Threat :
The threat of cheaper substitutes can be offset to some extent by
lowering prices.
5) Effective Entry Barrier :
Cost advantage acts as an effective entry barrier for potential
entrants who cannot offer the product / service at a lower price.

Prof.(Dr.) Nitin Zaware 8

Limitation of Cost Leadership / Low-cost Business Strategy:

Possibility of Duplication of
Cost Reduction Technique

Dilution of Customer Focus

Reduction in Scope of Product

/ Service

Great Threat of Technological

Shifts

Prof.(Dr.) Nitin Zaware 9

Limitation of Cost Leadership / Low-cost
Business Strategy:
1) Possibility of Duplication of Cost Reduction Technique :
The duplication of cost reduction techniques makes the position
of the cost leader vulnerable from competitive threats.
2) Dilution of Customer Focus :
Cost leadership is obviously not a market - friendly approach.
Severe cost reduction can dilute customer focus and limit
experimentation with product attributes.

Prof.(Dr.) Nitin Zaware 10

Limitation of Cost Leadership / Low-cost
Business Strategy:
3) Reduction in Scope of Product / Service :
Depending on the industry structure, sometimes less efficient
producers may not choose to remain in the market owing to the
competitive dominance of the cost leader.
4) Great Threat of Technological Shifts :
Technological shifts are a great threat to a cost leader as these
may change the ground rules on which an industry operates.

Prof.(Dr.) Nitin Zaware 11