Definition: Cost leadership is a strategy companies use to increase efficiencies and reduce production costs below the industry average or their closest competitor.
What Does Cost Leadership Mean?
What is the definition of cost leadership? It’s a method to reduce costs and produce the least expensive goods in a market or industry in an effort to gain market share. The modern business environment is a very complex and sophisticated one with consumers being aware of the choices available to them. One way firms differentiate themselves is through competitive pricing. Businesses who have the least production costs are able to offer the same level of product quality compared to their competitor for a much lower price.
Consumers are constantly looking to increase their purchasing power and if that cannot be achieved through an income increment, then buying more at a lower price is the next best alternative. Businesses who seek to be cost leaders tap into this opportunity to offer the average consumers great products at great prices.
Let’s look at an example.
Example
A company like Payless is a good example of this strategy. They try to limit the number of employees in their shops and allow customers to serve themselves in an effort to cut operational costs. These cost cutting measures allow them to offer brands that are of a certain quality at an affordable price. Their slogan suggests that customers can get the same quality goods at a lessor price than their competitors.
Wal-Mart is another example of this concept. They have made their operations so efficient and built such a large distribution network that they are able to get preferential pricing on goods and sell them to consumers for less than other retailers. For example, a Lego set at Wal-Mart might sell for 10 percent less than the same set at Target.
This concept is just as prevalent in the manufacturing industry where firms develop new operations to cut costs in an effort to lower prices for their customers.
Summary Definition
Define Cost Leadership Strategy: Cost leadership means a company that reduces production costs relative to its competitors and thus can charge lower prices for its products than other companies in the industry.
