2. It works primarily in overly saturated marketplaces. Pricing a product is one of the most important aspects of your marketing strategy. This strategy picks a single market niche or sub marketing to sell products to. Efficiency Efficiency is the amount of output you get for a unit of input. Although, it is highly effective in gaining market share as well as drawing the customers' attention, it is difficult to deploy. Selling a home is a costly transaction. A cost-leadership strategy is a broad approach to business whereby a significant aspect of a company's strategy is an effort to operate as the lowest-cost business in its industry. A flexible business strategy that can meet changing demands and growth. Three ways to achieve cost leadership 1. As a business owner, you need to consider the various marketing strategies that will have the greatest impact on your revenues and profits. We refer to them as trade-off strategies because Porter argues that a firm must choose to embrace one strategy or risk not having a strategy at all. 1. 3. 2. Developing an effective cost leadership strategy takes some time, research and persistence. This approach requires fixed costs to be spread over a large number of units of each product/service meaning lower unit costs. Low inventory levels are maintained, the inventory turnover is high, the plant lead time is less, the buyers are lowcost and match their value chain with the customer, they enable time-definite deliveries with low variability and orders are generally standardized. This makes the company best placed to survive a price war and generates the highest margins if a price war does not occur. Some of the ways that firms acquire cost advantages are by improving process efficiencies, gaining unique access to a large source of lower cost materials, making optimal outsourcing and vertical integration decisions, or avoiding some costs altogether. A mechanic's shop might use this as a way to get clients in and to build relationships with them, hoping the clients will later use the mechanic for higher-end jobs such as a new transmission. IKEA is the cost leader in the furniture industry. Your company would focus primarily on building a large market share by providing prices lower to competitors. Weigh the attractiveness of the various strategies and decide which of the ones are more advantageous for you to pursue. They’re able to sell their products so cheaply because they have cut operating costs in other key areas. Maintenance for … Here is an explanation on how to organize your business strategy to work for you. The result is a homeowner with a newly updated kitchen for less money. We all purchase goods and services. 1. Overall Cost Leadership Strategy. Despite its name, Dunkin’ Donuts makes more money selling inexpensive coffee than it does from selling donuts. Cost Leadership. Officials at a company will likely need to update its cost leadership strategy regularly to account for price increases in labor and raw materials, changes in the market and new competitors. Another good example of cost leadership strategy is the Swedish home furnishing brand, IKEA. An example of how this strategy can be successful is by looking at the Wal-mart model. Some are kitchen specialists while other are bathroom specialists. Here is a look at each of these in detail and how you can use them in your own business model. An example of how this strategy can be successful is by looking at the Wal-mart model. Supply/Procurement Chain – Accomplished through bulk buying and enjoying quality discounts, squeezing suppliers on price, instituting competitive bidding for contracts, and working with vendors to keep inventories low using Just in Time purchasing or Vendor Managed Inventory. Cost Leadership Strategy: ... the cost leadership strategy is employed when a company aims to be the lowest cost producer in the market. Cost leadership is a firm that enjoys a lower unit cost for a good than all competitors in a market. 2. Pursuit of cost leadership is a common type of business strategy. This strategy is used by the companies only in order to set up their customer base in a particular market. Simply being amongst the lowest-cost producers is not good enough, as you leave yourself wide open to attack by other low-cost producers who may undercut your prices and therefore block your attempts to increase market share. This helps sellers save money, avoid the hassle of selling by owner and still get the help to properly market their home. Several examples of firms pursuing a cost leadership strategy are illustrated below. Example of Core Competencies for a Heating Company, University of Cambridge: Porter's Generic Competitive Strategies (ways of competing), Economic Times: Definition of 'Cost Leadership', University of Minnesota: 5.5 Focused Cost Leadership and Focused Differentiation, Techniques for Flipping Houses for Profit, How to Sell a House at Relative Fair Market Value, The Best Advertising Techniques for Flooring. The Cost Leadership strategy is exactly that – it involves being the leader in terms of cost in your industry or market. A look at marketplace demands and real customer needs. Thus a cost leadership strategy helps create barriers to entry that protect the firm—and its existing rivals—from new competition. Strategic managers in the organization make a concerted effort to lower business costs in order to achieve a competitive advantage. This is certainly true for Walmart, for example. IKEA has successfully combined low cost with good quality, and its “democratic designs” that balance function, quality, design, and price giving IKEA a competitive edge. An understanding of your overall core competencies and the competencies you will need to develop over time. 5. A negative side to using this strategy is the large amount of advertising money that is spent in establishing your brand or image. The largest retail chain in the world, Wal-Mart also believes in cost leadership. Figure 5.12 image description: Focused Cost LeadershipFirms that compete based on price and target a narrow market are following a focused cost leadership strategy. These baskets may be focused primarily on high end crystal champagne glasses targeted towards the bridge and groom. Cost leadership is one strategy where a company is the most competitively priced product on the market, meaning it is the cheapest. You see examples of cost leadership as a strategic marketing priority in many big corporations such as Walmart, McDonald's and Southwest Airlines. Specializing helps them work with wholesale distributors to get the best pricing on the standard package they sell to clients. Typically, companies that focus on this type of strategy such as Apple, can charge premium pricing since their clientele is more brand loyal and less price sensitive. 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