Cost Leadership Strategy By Aakashsh Ahmed Mba Cs 3.docx

Cost leadership strategy Sometimes, a company can improve its net profits by making a product different rather than becoming a cost leader – selling items for the lowest price on the market. Even if a company attains cost leadership, it may not hold onto that lead for long. In general, smaller firms try to compete with larger firms on differentiation rather than cost leadership. What is cost leadership When company sells a product or service she tries to lower the price of the product and service than the competitors by decreasing the cost. This gives more benefit to the company to create value for the itself and for the custotomers. nstead of offering just selected items at a low price to bring in customers, Wal-Mart uses its massive buying power to force supplier companies to become more efficient and sell products at a low price all the time.

Benefits of cost leadership Market share: Charging a lower price but selling a larger volume of a good allows a company to maintain its profits and expand its market share. Some consumers shop only at stores that offer the lowest price, which means industries like groceries and gasoline often have price wars. The winner in a price war enjoys protection from rivals because competitors whittle away their profits attempting to offer the new lowest price. Creates entry barriers: The cost leadership strategy also makes it difficult for new companies to enter the market because of thin profit margins. Charging a lower price but selling a larger volume of a good allows a company to maintain its profits and expand its market share. Some consumers shop only at stores that offer the lowest price, which means industries like groceries and gasoline often have price wars. The winner in a price war enjoys protection from rivals because competitors whittle away their profits attempting to offer the new lowest price. The cost leadership strategy also makes it difficult for new companies to enter the market because of thin profit margins. Disadvantages of cost leadership Lost sight Focusing on price can make the company lose sight of evolving customer tastes and preferences. Once a company introduces a process that saves the business money, other companies can quickly copy that technique and lower their prices. New technology can make research and development that takes years to complete obsolete almost immediately. For instance, people rarely pay for long-

distance phone charges because cell phone technology makes landlines irrelevant for many consumers Price war Company can lower prices if one company lowers the prices. Lowe profit margin Focusing on the only lower price target market it decreases the profit margin for the company.

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