Cost Leadership: A Generic Strategy

Generic strategies , as the name suggests are broad strategies that are not dependant on an industry or a firm. These strategies are applicable at business level and they suggest ways of gaining a competitive advantage.

One of the generic strategy is Cost Leadership Strategy.

A low cost leadership strategy aims at enhancing the ability of a firm to produce goods and services demanded by the customers at a lower cost than that of the competitors. In most of the cases the firms who are trying to incorporate low cost strategies aim to sell mass products or in other words standardize products for the mass market. They generally do not advocate customization for a particular customer’s need , taste or preference.

The Low cost leadership strategies can be imitated by ones competitors, and thus low cost leadership is not a one time process. A successful way of adopting this strategy can be by using the Japanese mantra of “Kaizen” that focuses on continuous improvement. Continuous rethinking is important for the implementers of this strategy.

A continuous effort to reduce the cost than that of the competitor makes a company efficient in that area. Efficiency attracts more profit margins for the company and act as a strong barrier for the entry of new competitors. However there will always be a threat of big giants or small firms in collaboration with foreign firms entering the market and challenging the cost effective leadership.

In India Big Bazaar has been essentially working on a low cost leadership strategy. It sells branded products that other retailers are also selling but Big Bazaar sells at a price 10-15 percent lower than that of other retailers. How does Big Bazaar do so? Well, Big Bazaar works on a huge scale. It operates in more than 72 cities and is able to apply economies of scale effectively thus giving it the low cost advantage. However this one time idea cannot help them sustain their position as the market leaders, thus they kept innovating their cost structures seeking low cost suppliers and contracting with suppliers for steady supply. Big Bazaar showed how economies of scale and experienced efforts help to bring down the costs as the capacity grows.

McDonalds is another interesting example of being a cost effective leader. It has been very successful in giving its customers fast food at a very low price. Again the question arises how do they do so? They do so by hiring inexperience staff, they train them rather than keeping professional cooks. This lowers their Human Resource cost and they keep very few highly paid managers. This saving that they do in terms of recruitment helps them offer their products at bargaining prices. McDonald’s innovative ways to reduce the cost enables them to truly serve a “happy meal”.

“The ability to change constantly and effectively is made easier by high-level continuity.”

                                                                                                                  -Michael Porter