Cost Leadership

Cost Leadership

Cost Leadership In cost leadership, a firm sets out to become the low cost producer In Its Industry. The sources of cost advantage are varied and depend on the structure of the industry. They may include the pursuit of economies of scale, proprietary technology, preferential access to raw materials and other factors. A low cost producer must find and exploit all sources of cost advantage. If a firm can achieve and sustain overall cost leadership, then it will be an above average performer In Its industry, provided It can command prices at or near the Industry average. 2.

Differentiation In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions itself to meet those needs. It is rewarded for its uniqueness with a premium price. 3. Focus The generic strategy of focus rests on the choice of a narrow competitive scope within an industry. The focuser selects a segment or group of segments in the industry and tailors its strategy to serving them to the exclusion of others. The focus strategy has two variants. A) In cost focus a firm seeks a cost advantage in its target segment, while in (b) differentiation focus a firm seeks differentiation in its target segment. Both variants of the focus strategy rest on differences between a focuser target segment and other segments In the Industry. The target segments must either have buyers with unusual needs or else the production and delivery system that best serves the target segment must differ from that of other industry segments. Cost focus exploits preferences in cost behavior in some segments, while differentiation focus exploits the special needs of buyers in certain segments.

Cost Leadership Strategy This strategy Involves the organization aiming to be the lowest cost producer and/or distributor within their Industry. The organization alms to drive cost down for all production elements from the sourcing of materials, to labor costs. To achieve cost leadership a business will usually need large scale production so that they can benefit from “economies of scale”. Large scale production means that the business ill need to appeal to a broad part of the market. For this reason a cost leadership strategy is a broad scope strategy.

A cost leadership business can create a competitive advantage: – by reducing production costs and therefore Increasing the amount of profit made on each sale as the business believes that Its brand can command a premium price or ; by reducing production costs and passing on the cost saving to customers in the hope that it will increase sales and market share Low cost producers include Easy Group, Ryan Air, and Walter. Differentiation Strategy To be different, is what organizations strive for; companies and product ranges that appeal to customers and “stand out from the crowd” have a competitive advantage.

Porter asserts that businesses can stand out from their competitors by developing a or service features which are different from competitors and appeal to customers including functionality, customer support and product quality. For example Promotion folding bicycles when folded are more compact than other folding bikes. Folding bikes are usually purchased by people with limited storage space at home or on the eve; a compact bike is therefore a valued product feature and differentiates Promotion bicycles from other folding bicycles.

A differentiation strategy is known as a broad scope strategy because the business is hoping that their business differentiation strategy, will appeal to a broad section of the market. New concepts which allow for differentiation can be protected through patents and other intellectual property rights, however patents have a certain life span and organization always face the danger that their idea which gives them a competitive advantage will be copied in one form or another.

Focus (Niche) Strategy Under a focus strategy a business focuses its effort on one particular segment of the market and aims to become well known for providing products/services for that segment. They form a competitive advantage by catering for the specific needs and wants of their niche market. Examples include Roll Royce, Bentley and Saga a UK company catering for the needs of people over the age of 50. Once a firm has decided which market segment they will aim their products at, Porter said they have he option to pursue a cost leadership strategy or a differentiation strategy to suit that segment.

A focus strategy is known as a narrow scope strategy because the business is focusing on a narrow (specific) segment of the market. Are You “Stuck In The Middle” Some businesses will attempt to adopt all three strategies; cost leadership, differentiation and niche (focus). A business adopting all three strategies is known as “stuck in the middle”. They have no clear business strategy and are attempting to be everything to everyone. This is likely to increase running costs and cause confusion, s it is difficult to please all sectors of the market.

Middle of the road businesses usually do the worst in their industry because they are not concentrating on one business strength. Conclusion To create a competitive advantage businesses should review their strengths and pick the most appropriate strategy cost leadership, differentiation or focus. Although each of these strategies are known as generic strategies (because they can be applied to every industry) they will not suit every business.

For example small businesses may mind it difficult to generate the economies of scale needed for broad scope cost leadership but a smaller customer base may enable them to offer a personalized service through a narrow scope focus strategy. Conversely a larger business may not be able to generate sufficient revenue through a focus strategy but be able to pursue aggressive broad scope cost leadership because of the size of the business. Whatever strategy a business decides to adopt they should make sure that it isn’t middle of the road because one business can not do everything well. ;ties/