Low cost strategy is centered on the capability of the company to produce and deliver products of competitive quality at lower costs. Cost leadership strategy is much more than cost reduction initiatives that get lot of prominence in strategic planning and review session of any company as a means to improve the bottom line of a company by improving its efficiency. Some companies use their efficient cost structures to protect their markets from the competitors by responding to competitors’ move of making in-roads in the market space by reducing prices. Such reactive response may make a company predominantly inward focused.
Positioning - low cost strategy
Better way to strategically position a company on the advantage of cost is to increase market share by transforming from lowest cost producer to lowest cost supplier of products. This way the company translates its cost advantage into price advantage for its customers and thereby improves the market share. The prospect of increasing the market share provides a great opportunity for the company to leverage the economies of scale coupled with the ruthless cost cutting measures it plans to execute. More the competitive space it occupies – which also means that more competitors eliminated – more effective are economies of scale and as a result the costs are driven still lower. When a company is able to transform the efforts of cost reduction into cost advantage for customers the company can be said to be successfully pursuing low cost leadership strategy.
Wal-Mart is one company that continuously strives to reduce costs and in the market place it has got the image of supplier of products at the lowest prices. This is how Wal-Mart captures the markets and eliminates the competitors and improves revenues and market share. Economies of scale and efficiency form the core around which Wal-Mart executes its strategy. Companies pursuing cost leadership strategy compare each and every activity along their value chain with competitors and are committed to surpass them. Innovation in such companies is focused on process improvements (both incremental and quantum) rather than on products (new product development). In fact companies pursuing cost leadership strategy target mass markets with proven products.
Supplier and partner relationships drive low cost strategy
A common theme across the companies that base their strategy around low cost leadership is supplier relationships. In other words they have sufficient control over in-bound supplies and logistics. Their cost effectiveness starts from the premises of their suppliers. This is very important as major costs are incurred in the inbound supply chain. Take Wal-Mart, who with its economies of scale exercises lot of bargaining power over suppliers. An important aspect of the unique Toyota Production System is strong supplier relationships and their development.
Know your customers
The cost leaders today generally miss out on one important aspect. They typically concentrate on delivering a product of competitive quality at the lowest cost and pass on part of the savings to customers. They are so obsessed with costs and pricing that rarely do they dissect the customer value proposition. This is a prospective area that may provide yet another cost reduction opportunity and at the same time attract potential customers from a niche segment. A company when it compares the value proposition that it offers against the attributes that customers really value, new insights and opportunities may open up. Such a study may reveal some factors on which the company may be incurring substantial expenditure and yet the customers do not care about the particular feature or facility. Cutting on such frills may help in improving the bottom line. But cuts on frills accompanied by thrust on factors where company’s offering is below the customers’ expectations provides an excellent opportunity for cost cutting and serving enhanced value to the customers, which may draw customers from outside the current market space, just on the boundary of niche segments. Most popular no frills strategy is pursued by Southwest Airlines which based its strategy on clear understanding of the segment of customers it was going to serve by operating the flight services at lowest fares and prompt schedules. The clear understanding of expectations of the segment it was going to serve and competitive value proposition that this segment was being offered by the aviation industry opened up the real opportunity of lowering its costs and yet maximizing the value of low fares and adherence to schedules for its customers by keeping clear of facilities like baggage transfers, meals, seat arrangement etc., which any way the customers were not bothered about.
A company having low cost leadership when extends its thinking to the value its customers expect, can further strengthen its strategic position in the marketplace.