A cost leadership strategy is a business plan that aims to reduce unit costs for a product or service to the lowest level among all competitors in an industry. This is typically achieved by becoming more efficient than the competition in a number of ways, such as using cheaper materials, streamlining production processes, or implementing advanced technologies. By reducing unit costs, a company that employs a cost leadership strategy can offer its products or services at a lower price than its competitors, making it more attractive to consumers and giving it a competitive advantage in the market.
The use of systems and robotics to reduce the amount of labor that goes into the production of a product or delivery of service. General corporate overhead can also be automated. For example, a firm that completely automates customer billing such that human involvement is minimal.
Knowledge and knowledge processes can reduce costs. For example, an unusually skilled customer service representative may increase customer satisfaction at a hotel more than expensive renovations to rooms.
Organizational culture has a significant impact on productivity, risk management and cost reduction efforts. For example, a CEO who takes economy class flights to set an example for frugality across a firm.
Tools such as application software, equipment and machines can dramatically improve the productivity of employees. For example, a farmer with a combine harvester that breaks down once every 10 years will be more productive than a farmer with a combine harvester than breaks down every 5 hours.
Unit costs tend to drop as you achieve greater scale. This is known as economies of scale. For example, a farmer managing 500 acres of apple trees may produce a bushel of apples for $4 where a farmer managing 5 acres has costs of $7 a bushel.
Cost leadership depends on low input costs such that purchasing is an important consideration. Purchasing benefits from economies of scale whereby you are likely to get a bigger discount if you buy more. For example, a big box retailer that purchases a million units of shampoo a month for $2 a bottle where a family corner store buys the same product for $4 because they only purchase 20 units a month.
Location has a large impact on costs such as land, labor, electricity and supplies. For example, a hotel 4 blocks from a beach may cost $5 million where a hotel the same size on the beach represents a $50 million investment. This gives the further hotel far less capital costs such as interest expense such that its cost for offering room inventory is fundamentally lower.