It needs to be noted that the way the cost of products differs from their price, similarly, cost leadership isn’t the same as price leadership. The value of the price is usually higher than the value of the cost. Come on! Type 3: Differentiation 4. The cost leadership strategy is one of the so-called "Porter's Generic Strategies," and the value chain, outlined in Porter's 1985 book Competitive Advantage, is a series of events companies undertake that add value. This makes the company best placed to survive a price war and generates … A firm following a cost leadership strategy offers products or services with acceptable quality and features to a broad set of customers at a low price (Figure 5.3 “Cost Leadership”). Type 5: Focus –Best value In business strategy, cost leadership is establishing a competitive advantage by having the lowest cost of operation in the industry. Whereas the price is the money which the company GETS from that product ( a total of the production costs and seller’s profit). It contrasts differentiation strategies that emphasize quality or high value. Although the two often go together, cost leadership is not necessarily price leadership. It is tempting to think of cost leaders as companies that sell inferior, poor-quality goods and services for rock-bottom prices. To succeed in the marketplace, companies must embrace a competitive strategy. (2002) purport that value chain analysis is central to identifying where cost savings can be made at various stages within it and its internal and external linkages. – Meaning, Importance, & Examples, Digital Advertising: Definition, Types, & Examples, What Is After-Sales Service? We spend a lot of time researching and writing our articles and strive to provide accurate, up-to-date content. In 2003, Porter identified three generic types of competitive strategy: cost leadership, differentiation and focus. Campbell et al. Cost Leadership is the mechanism of establishing a competitive advantage by having the lowest cost of operation in the industry. Product development and advertising can both be quite expensive. Low-cost leadership strategies enable an organization to develop standardized products in large volume at low cost, which give that organization a competitive edge over the competitors in the market. The strategy can be used to target at large markets. By having the lowest costs associated with providing your products, you put your business in the unique position of being able to charge your customers the lowest price in the market for those products. Also, a company with the lowest prices isn’t necessarily the one with the lowest costs. Introduction… Michael Porter is a professor at Harward Business School. The choice between cost leadership and differentiation is of fundamental importance. The ultimate goal of the best-cost strategy is to keep costs and prices lower than other providers of similar products with comparable quality and features. Acquiring qualit… Since that time, some commentators have made a distinction between cost leadership, that is, low cost strategies, and best cost strategies. Cost leadership aims at having the lowest costs in a market. Cost-leadership is among several general business strategies developed by author and well-known business management guru Michael Porter. This site uses Akismet to reduce spam. A company could be the lowest cost producer yet not offer the lowest-priced products or services, thus possessing higher profitability. Thus, the cost is the money which a company GIVES to the production and introduction of a product in the market (like labour, capital, materials, wages, bills, and other transaction costs). He holds a Master of Business Administration from Iowa State University. In general, Porter's point in the value chain depiction is that companies can generate the greatest profit margins by emphasizing customer value in each of these stages. This strategy is difficult to execute in part because creating unique features and communicating to customers why these features are useful generally raises a firm’s costs of doing business. Type 5: Focus –Best value Low-Cost Leadership and Differentiation Strategies Laura Allard November 21, 2010 William Hogan Management Cases Upper Iowa University Abstract This paper discusses Low-Cost Leadership and Differentiation business strategies.The paper explains what each strategy is and how they can be applied, utilized and maximized as strategies for a company. The primary objective of a firm aiming to attain cost leadership is to become the lowest cost producer in comparison to the competitors. They claim that a low cost strategy is rarely able to provide a sustainable competitive advantage. Let’s face it Walmart dominates many retail categories and competes against stores like Target and Kmart and Costco and Acme. First, determine your organization’s key leadership drivers — the 3-5 determinants of sustainable competitive advantage for your particular organization in your particular industry. Type 2: Best Value-Strategy 3. The expenses incurred by a business in the process of bringing a product or service into the market is known as the cost; while the money which the customers pay for that product or service is known as its price. – Types & Examples, What Is White Label? Michael Porter has argued that a firms strengths ultimately fall into one of two headings: cost advantage and differentiation. | IKEA Business Model. List of the Advantages of Cost Leadership Styles 1. 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