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Proposed definitions will be considered for inclusion in the Economictimes.com Definition: 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. It is difficult to deploy the strategy because the management must constantly work on reducing cost at every level to remain competitive. Description: Cost leadership is a part of marketing strategy. Although, it is highly effective in gaining market share as well as drawing the customers' attention, it is difficult to deploy. The management team of the company has to constantly work towards reducing the cost of not just one product, but the entire range of products in the company's portfolio. Cost leadership does not mean that a company produces goods which are of inferior quality at comparatively cheap rates. That strategy will ultimately lead to failure. To deploy this strategy, a company has to produce goods which are of acceptable quality and specific to a set of customers at a price which is much lower or competitive than other companies producing the same product. The most famous cost leader in India is Big Bazaar, followed by Vishal Mega Mart.
Related NewsStrategic planning can take any organization to its pinnacle. Thus, companies need to consider various strategies to remain successful and keep their plus side against their competitors and continue to have a positive impact on revenue and profits. Strategies can range from competitive pricing to hiring skilled teams to reduce cost and all of them can be focused on one and only one goal “success and long-run stability” of the company. But today we will talk about “Cost-saving strategies”. The companies seeking cost advantage will have to focus on “an effective cost leadership strategy”. What is Cost leadership?
Examples:a. Home Renovation
b. Realtor Services
Difference Between Cost Leadership and Price LeadershipSo often, people use the terms price leadership and cost leadership interchangeably, but these two are entirely different concepts.
What are the benefits of employing a cost leadership strategy?
How does it work?Let us take the example of the airline industry and try to understand this concept. The airline industry is a highly competitive market and some companies have adopted the cost leadership strategy to dominate the market and achieve a better position among its rival. 1. Southwest from the U.S.A. is credited as the originator of the low-cost airlines business model, but the phenomenon spread worldwide in the 1990s. 2. In the airline business, the market is often segmented by trip duration and by trip purpose. 3. The Airline that has business travelers as their primary target segment is known as full-service carriers while the low-cost carriers are focused on leisure travelers. 4. There are differences between the business models of these two carriers 5. The low-cost carriers have adopted many modifications to gain a competitive advantage over the traditional airlines such as internet paperless booking, minimum cabin crew with lower wage scales, high utilization of airports, low turnaround time, one class of seating to fit more seats, low luggage, and customers paying for refreshments. 6. They utilize a business model with an emphasis on low fares, reducing overheads, and cost cuts by using secondary airports with cheaper landing charges. 7. With a reduction in costs, low-cost airlines are even able to operate a wider point to point journeys than the traditional airlines, helping them to earn higher profit margins. 8. Consequently, the low-cost carriers were able to capture a higher market share in the aviation industry, and traditional airlines set up their own low-cost subsidiaries or lower their prices. 9. The following table will help us understand the increasing worldwide market share of low-cost airlines from 2007-to 2019 Source: https://www.statista.com/statistics/586677/global-low-cost-carrier-market-capacity-share/ 10. According to Statista, In the United States, the Low-cost carriers hold above 30 percent of the domestic market with Southwest ranked second among the leading airline in the U.S., with a market share of 17.6 in 2019, just behind American Airlines. 11. Few examples of the biggest low-cost carriers in the United States is Southwest Airline with a market capitalization of $14.1 billion (May 2020) and the biggest carrier in terms of originating domestic passengers boarded. JetBlue Airways Corp. known for the most legroom in coach class, free TV, and broadband internet service on the flight has a market capitalization of $2.2 billion (May 2020). 12. Another example is Allegiant Travel, which runs Allegiant Air and is known for connecting small and mid-sized, has a market capitalization of $1.3 billion (May 2020) Other Examples1. Wal-Mart Stores
2. McDonald Restaurant
3. Ikea
1. Financial Cuts
2. Lack of Innovation
3. Applicability to Other Products
4. Consumer Feedback
5. Increase in Competition
6. Capital Availability
Summary
FAQs1. What is a cost leadership strategy?The cost leadership strategy is a business model that focuses on reducing the cost of production and offering the lowest priced products to outperform competitors and gain market share. 2. What is the difference between cost leadership and price leadership?Cost leadership is when a business prioritizes reducing the cost of production to offer the lowest priced products. Price leadership is when a business offers the lowest price as its main selling point. 3. What are the advantages and disadvantages of using a cost leadership strategy?The advantages of the cost leadership strategy include an increase in market size, a higher chance of survival during downturns, more capital available for upgrades, and higher profit margins. The disadvantages of the strategy include financial cuts to critical areas like customer service, lack of innovation, lack of applicability to premium products, change in preferences of the consumer, increased competition, and a crunch in capital availability. 4. What are the characteristics of a cost leadership strategy?The characteristics of a cost leadership strategy include reducing the cost of operation, producing the lowest priced products, and outperforming competitors. 5. Why is cost leadership strategy important?The cost leadership strategy is important because it allows businesses to produce products at a lower cost and offer them at a lower price than competitors, which gives them a competitive advantage. How does a cost leadership strategy generate higher profit?Cost leaders may enjoy increased market share.
This means that the company with the lowest prices is likely to sell the most units. The more units a company sells, the more its market share increases. In turn, when the market share of a company rises, the unit cost decreases, potentially fueling even greater profits.
What is cost leadership strategy in marketing?Definition: 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. It is difficult to deploy the strategy because the management must constantly work on reducing cost at every level to remain competitive.
What is the goal of a cost leadership strategy?The cost leadership strategy is a business model that focuses on reducing the cost of production and offering the lowest priced products to outperform competitors and gain market share.
What must a cost leadership strategy accomplish to be successful?What must a cost-leadership strategy accomplish to be successful? A. It must increase the firm's cost above that of its competitors while offering adequate value.
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