Cost leadership is a strategy that is aimed at ensuring that costs remain as low as possible. It is a competitive strategy used by many organizations by giving them a competitive advantage in the market. Cost leadership strategy is an indication of how a firm’s theory in successful competition is centered on low costs and prices. It ensures that products of the same value are offered at a lower price in order to attract more customers. An organization that uses a cost leader often positions its products to target the average customers in the market with little or no differentiation.
This strategy uses the low-margin high-volume kind of approach. Key areas in cost leadership are materials, management of logistics, and manufacturing. An example of a cost leader is Wal-Mart which is able to withstand the five forces of competition. With low prices, it is able to better its profits as compared to its rivals firms which charge higher costs. The low cost also gives it a competitive advantage which is a significant entry barrier. By charging low prices, it is able to buy large volumes of goods from suppliers and thus enjoy economies of scale.
A cost leader is likely to face fewer negative effects if the suppliers increase their prices or if demand for its products forces prices to go down. However, a cost leader is prone to face some drawbacks. The first drawback is that, in most cases, there is a danger of out competition on the basis of cost. If this happens, the leader will be forced to continuously reduce prices which may not be profitable in the long term. The other drawback is that the persistent force to cut costs may engrave corners that displease customers. An example of this was the case in which Toyota attempted to market a car in Japan with unpainted bumpers. They were not successful since customers were quick to notice it forcing the company to withdraw the model.