Cost Leadership Meaning
In your home if you have two cars and 5 family members want to go to the same place then instead of taking two cars you take only 1 car than you are saving fuel cost associated with taking the second car this is nothing but strategy to save extra cost without much of inconvenience, in case of corporate world also many companies adopt this strategy which is called cost leadership strategy in which company try to produce goods or services at lowest possible price by ensuring that minimum wastage of resources as well as optimum usage of all available resources so that company can charge lowest possible price from the consumers of the good or service. In order to understand this concept, one should look at some of the advantages and disadvantages of cost leadership –
Advantages of Cost Leadership
Long Term Sustainability
The first and foremost advantage of this strategy is that it helps the company in being sustainable for a long period of time since company is adopting cost-saving strategy for production of goods or services it can sustain even when sales are not good for some period of time because of cost efficiency which is not the case with other companies which need consistent good sales in order to cover their operational cost which is on the higher side.
Tackling Competitors
In case of corporate world tackling competition is the biggest challenge because it eats all the sales as well as profits of the company and that is where this strategy can be quite useful because when company is producing goods or services at lowest possible price it can afford to price their product or service at competitive rates which few companies can match. In simple words due to cost leadership company can afford to price their product or service at lower rates which automatically nullifies the competitors as not many companies can afford to challenge the company’s price in the market.
Increase in Efficiency
When a company adopts this strategy all departments have to follow the cost-saving model which in turn results in an improvement in the efficiency of not only the production department but also other departments like finance, marketing, technical and other departments of the company. In simple words, if your parents cost-conscious than chances are you also will be cost-conscious same is the case with the company where if top management emphasis is on cost control than chances all departments and employees will try to achieve efficiency in their work.
Disadvantages of Cost Leadership
Ignores Other Important Factors
The first and foremost disadvantage of cost leadership is that ignore other important factors like government policies, economic environment, the reaction of competitors, consumer tastes and so on which have a major role to play when it comes to the success of any product or service. In simple words just by cutting costs and offering the product at cheaper rates is no guarantee that the company will be able to achieve good sales as well as profit as other factors also play their role when it comes to the general business environment.
Consumers are Ignored
In case of this strategy consumers interests are ignored as main motive of the company is to concentrate on producing reasonable quality product in cheapest possible way and in this age where consumer is the king company cannot afford to ignore the consumer interest which is the reason why this strategy may not be successful where consumer is knowledgeable, quality conscious and aware about close substitutes of the product or service.
Comprise on Quality of Product
Another problem with this strategy is that since the focus of the company is on cutting costs it leads to company compromising on the quality of the product which in the long run can be a suicidal strategy, besides this strategy does not promote any creativity or expenses on research and development which again can be a big negative as far as long term growth of the company is concerned.
As one can see from the above that cost leadership has pros as well and cons and that is the reason why any company before thinking of implementing this strategy should carefully read the above points and then take the decision whether to implement this strategy or not.