By Nino Gogitdze

What is a competitive strategy and how does it help companies? Unless you have a cash-bearing tree in your lawn, I’m sure you’ve looked for ways to bargain, or went an extra mile to buy something at a lower cost. While there are many characteristics that drive the purchasing decisions, the price is a significant contributing factor. It’s interesting how larger organizations figure out how to sell items at lower rates than others. How is it ultimately profitable to drop their prices? Companies can establish lower prices by cost leadership, which is one of the most popular marketing strategies.

What Are The Five Generic Types Of Competitive Strategy?

Economies of scale mean to decrease the costs of manufacturing. The size of an operation is a determining factor of economies of scale. In this way, the larger the business, the more they are able to cut down on costs.

Advantages of size: A sizable capital increases the likelihood of extricating special arrangements that become benefits. For example, larger orders from suppliers can get bulk discounts. 

Better and innovative technology: Advancements in production techniques are a significant part in reducing costs. If a company uses better technology, it can increase its efficiency and can probably keep its position as a cost leader.

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Focus means that an organization doesn’t need to be large and expansive to be a cost leader. However, if an organization can figure out how to deliver one item with total concentration and productivity, it can focus all its efforts in becoming a cost leader in its industry. To put it in other words,  with more focus on fewer items, a company can easily achieve cost leadership.

Raw materials: Costs can significantly decrease depending on the access an organization has over the essential crude materials needed for manufacturing. One company might be paying large sums of money for materials while another may have access to a lower-cost but equal alternative. In other words, access to raw materials can significantly reduce the costs of manufacturing and allow for lower prices to the consumer.

Operating proficiency means developing ways to reduce the time needed for operational activities. By finding ways to improve the operational scheme of a company, working costs can be significantly reduced. This gives a company more freedom to lower prices.

What Is Cost Leadership?

Cost Leadership is the competitive strategy method of increasing market share by having the least operational costs to enable a business to decrease prices. It’s particularly valuable in a market where cost is a significant factor in determining price.

Image source: cost reduction approach tactical strategic

A business’s goal here is to have the least costs when compared to its competitors. This is commonly done by upscaling the entire operation, which empowers a business to achieve economies of scale or develop efficient operations. Other companies may reduce costs by acquiring raw materials and starting the manufacturing process from scratch. This means they are paying less to get high-quality results. 

Remember that cost is what a business pays to produce and provide a product, whereas price is what the consumer pays. They are proportional to each other, but a company can adjust their relationship accordingly to achieve higher profit margins. They may also choose to have a lower profit margin, to increase revenue by generating more sales.

Cost Leadership & Price Leadership

Cost leadership isn’t the same as price leadership. An organization can achieve the least operational and production costs, yet still be unable (or unwilling) to have the lowest prices. A cost leader may have the same price as its competition but provide a better quality product.  

The benefit of cost leadership is that it gives the chance to improve, move, and compare with their rivals, particularly in cost-focused businesses. The objective here is to decrease costs and not just prices. 

Does The Low Cost Providing Competitive Strategy Work Well?

Whenever new companies use low prices to attract buyers, a competitive strategy works well. And whenever buyers have the ability to drive fierce rivals between businesses, a low-cost provider can effectively beat competitors.

When Is A Low-cost Provider Competitive Strategy Attractive?

Being a low-cost provider is an attractive option in markets where there is little variation in the ways consumers use a product, or when the product is a normalized part for consumer culture. There are many ways that cost leadership can give businesses a competitive advantage over their rivals. However, it is the most attractive when there are opportunities to provide a better bargain that competitors are unable to achieve.

Instructions To Achieve Cost Leadership

Accomplishing cost leadership is certainly not an extremely difficult task. A cost leadership strategy depends on the fundamental rule that the more units created, the lower the unit cost. An effective cost leadership strategy empowers organizations to sell more units at a lower expense for the company. There are no ways to achieve price leadership over the long haul without creating a decrease in cost.

Asian Businesswoman Leading Meeting At Boardroom Table  Image source: Google image

How Can A Competitive Strategy Control The Value Chain Structure?

Organizations  analyze the structure of their industry and utilize that research. The next step is to design the business to cater to that research. The financial definition of value is the measure of cash that a client will pay for an asset. A Highly valued product with a low cost produces a relatively higher margin. Naturally, having a high margin is an objective of any business. A value chain is a complex process that can be divided into primary and support activities. The ultimate goal of using a value chain is to provide a valuable product.

Success is in choosing the right strategy for your consumers and competitors. A valuable competitive process will increase loyalty in the long run.

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