Cost Leadership – Strategies, Advantages, Disadvantages Strategies to achieve Cost Leadership. 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.eval(ez_write_tag([[300,250],'letslearnfinance_com-medrectangle-4','ezslot_9',107,'0','0'])); 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. That is why the advantages and disadvantages must be carefully weighed before deciding on a strategy in this category. As indicated, the cost leadership strategy will reduce the power of suppliers. Segmentation (many competencies, narrow market scope). A disadvantage of the cost leadership strategy is that technology can threaten the firm’s position with competitors offering new products or less expensive manufacturing processes. Consumers lose diversity in the availability of products and services. Focused cost leadership is the first of two focus strategies. Porter later softened his stance in this regard recognizing the benefits of a hybrid approach in some cases. Wal-Mart, for example does not spend hundreds of millions of dollars on store design to create an attractive shopping experience as chains like Macy’s, Dillard’s, or Saks Fifth Avenue have done.” [1]. New technology can also yield a cost benefit to new construction such that the firm finds itself with high sunk costs in facilities and process R&D. This outsourcing of IT work to offshore firms is happening at organizations such as Disney, the University of California and [Insert Any Bank Name Here]. Companies that use a cost leadership strategy and those that use a differentiation strategy share one important characteristic: both groups try to be attractive to customers in general. 09.24.15 Engineering Management, Strategy, Classic Innovation Strategy (Part 1 of 3). I'm about to bash my head in to a wall. Despite its attractive price tag, the Yugo was a dismal failure because the car was so poorly made that drivers simply could not depend on the car for transportation. Fill in your details below or click an icon to log in: You are commenting using your WordPress.com account. Read through the 2nd & 3rd paragraphs on the first page - discussing the history of the company. Some of the ways that firms acquire cost advantages are by improving process efficiencies, gaining unique access to a large source of lower cost materials, making optimal outsourcing and vertical integration decisions, or … Since the strategy involves providing the lowest costs, companies must strive for a large market share when employing this strategy. There are also times when price leadership will drive consumers away. Each business has a unique purpose and reason for existing, a mission. Differentiation is expensive; the more a company expends resources to make its products distinct, the more its costs rise. A cost leadership strategy is one of three classical strategies. New comments cannot be posted and votes cannot be cast. Back when I was a heads down developer analyst working at General Motors, my mindset was completely focused on being a data expert and techie. These three strategies help contextualize how businesses aim to obtain profits in their respective marketplaces; they also help businesses understand how they can seek new opportunities for advantage. At the time I did not have a broader understanding of business concepts and business strategies. I found value in studying and discussing Porter’s framework that defined generic competitive strategies. I must be missing something huge because Prompt D in Task 1 is completely going over my head. Additionally, as technological change enters the marketplace, new competitors can attack cost leaders through innovation thus nullifying the cost leader’s accumulated advantages. A lower cost structure enables a business to reap higher than average profitability. It is crucial for a business to know what its purpose is before the organization can design products, services, or programs for sale. As an aside, I could prattle on ad-nauseam about Wal-Mart and how its technological capabilities provided the organization significant advantages (and I have here: Part 1, Part 2 and Part 3). save hide report. Although customers may not find exactly what they are seeking, they are attracted to the lower prices [1].

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