Cost leadership strategy emphasizes on being a cost leader by producing standardized products at a very low per-unit cost for consumers who are price-sensitive.
The firm pursuing Cost Leadership Strategy wants to beat competitors in price-war thereby gain market share.
Strategic variants like forward, backward, and horizontal integration help to gain cost leadership benefits.
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Cost Leadership Strategies are especially effective when:
a. The market is composed of many price-sensitive buyers,
b. Buyers do not care much about differences from brand to brand, or
c. There are a large number of buyers with significant bargaining power.
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It may be pursued through factors like:
a. Economies of scale,
b. Learning and experience curve effects,
c. The percentage of capacity utilization achieved,
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d. Linkages with suppliers and distributors
e. Developing better product or process design and so on.
A successful cost leadership strategy is evidenced by:
a. High efficiency,
b. Low overhead,
c. Intolerance of waste,
d. Intensive screening of budget requests,
e. Wide and effective controls,
f. Rewards linked to cost containment, and
g. Broad employee participation in cost control efforts.
Risk
Some risks of pursuing cost leadership are that –
a. Competitors may imitate the strategy, thus driving overall industry profits down;
b. Technological breakthroughs in the industry may make the strategy ineffective; or
c. Buyer interest may swing to other differentiating features besides price.