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. When products are manufactured in bulk, the cost of production reduces, which facilitate the organization to keep the prices of its products low in the market. Low prices capture abundant customers for purchasing of related products and hence the sales & profitability of the organization enhances greatly. Efficiency is emphasized in cost leadership strategies. In fact when products are manufactured in abundance, the organization not only acquires the economies of scale but also the effects of experience curve.
The manufacturing product is usually standardized one which is manufactured at a low cost & is offered to large customers in the market. In order to maintain cost reduction strategies, the organization should ascertain the cost reduction in all dimensions of the business. Besides the production strategy, there should also be specific distribution strategy that is associated with the production strategy & deals with extensive distribution. The Promotional Strategy should also be in consistent with other strategies by highlighting the features of the products in a cost reductive manner.
Requirements for Low Cost leadership Strategies
There are certain requirements that make the application of cost leadership strategies quite successful. These essential features are as follow.
- The organization should possess massive market share
- The access to raw materials is effective
- The labor & other significant inputs are beneficially accessed
The organization makes sure that these characteristics are available to it otherwise the competitors copy the cost leadership strategies. For proper implementation of the formulated strategies, the organization should also take into accounts the following efforts.
- Engineering skills should be effectively processed
- The manufacturing method & technique facilitate the suitable designing of products
- Inexpensive capital should be available to the organization
- The labor should be closely supervised
- Costs should be tightly controlled
- Quantitative targets provide basis for incentives
- There should be a number of price sensitive customers in the market
- The product differentiation can be achieved from limited number of ways
- Customers in the market should not be sensitive to the differences in brands
- There are a lot of customers in the market with bargaining power
- The strategies should be relevant to the differentiation
- There are associating diseconomies or economies of scale
- The maximum capacity of the organization should be utilized
- There are linkages with distributors & suppliers
There is cost leadership benefits associated with the horizontal, backward & forward integration strategies. But differentiation should be consistent with the cost leadership. The relative attractiveness of generic strategies are affected by a number of cost elements like diseconomies or economies of scale accomplished, the effects of learning & experience curve, the associations with distributors & suppliers , The proportion of capacity utilization accomplished etc.
There are certain others factors that should also be considered in making selection among a number of alternative strategies like
- The potential for knowledge sharing & cost sharing within the organization
- R&D costs linked with development of new product or modification in current product
- Tax rates
- Labor costs
- Shipping costs
- Energy costs
Cost leadership strategies are much profitable for such kind of organizations that have market in which there are price sensitive customers; there is large number of customers with bargaining power, there is limited number of methods to acquire product differentiation or when customers do not consider the differences among brands etc. The fundamental idea in this regard is that the competitors are under priced and thereby acquires larger share of the market which increases the sales of the organization and resultantly some competitors are kicked out from the market.
The organization that successfully implements the cost leadership strategies enjoys the following benefits.
- Low overheads
- High efficiency
- Intolerance of waste
- Limited perks
- Wide spans of control
- High screening of budget requests
- Rewards associated with cost containment
- Increased participation of employees in cost control efforts
Besides the benefits, there are certain risks that are associated with cost leadership strategies like the changes in the technology in the industry affects the effectiveness of the strategy, the strategy can be imitated by the competitors which reduces the profits of the organization, or the customers may swing to other non price differentiating features etc.
Advantages of Low Cost Producer:
The price fluctuation in the market influences the cost of production of any organization. The elasticity of demand can better explain this fact. In certain market the demand of particular product is sensitive to its price which is called price sensitivity of demand.
In other situation, there is limited number of ways to accomplish the product differentiation by altering the cost, features, price & quality of the product. In other situation certain people are brand sensitive and they express their personality or choice through certain brand. In case of bargaining power, there are more customers, suppliers & bargaining is associated with low price products as compared to high price products.