In this article we will talk about what it is and what are the advantages and disadvantages of using the cost leadership strategy? mentioning and explaining each of its advantages and disadvantages. Before we start to see these advantages and disadvantages, we will see What is a cost leadership strategy? to read the article with more context.
What is a cost leadership strategy?
This strategy consists of offering similar goods to competing companies, but with the difference that it has a lower cost, managing to differentiate itself from other companies in the market, since it has the lowest production costs of a product.
With lower prices than the competition in the market, the company takes the lead, having an increase in its profits. For this you must have a low price in consideration with other companies.
To achieve these lower costs, some factors must be taken into account, such as: better production techniques that reduce waste, controlling raw material costs, achieving good international marketing, lower prices for some products.
The position of a leading company is coveted among all companies, because with this leadership you can have better control of the environment in the market. This is one of the reasons why this strategy is applied, but always maintaining a business ethic that respects fair competition.
What are the advantages and disadvantages of using the cost leadership strategy?
Using the cost leadership strategy can bring several positive and negative aspects, which must be analyzed before applying this strategy. But first, we will mention and explain each of these advantages and disadvantages, so that they are used, when using or not using this strategy in the company’s business plan.
What are the advantages of using the cost leadership strategy?
Having the factor of producing products at a low cost is very important for companies, but also giving lower prices than those of the competition is an advantage in the market. This is just one of the advantages that the cost leadership strategy has, below we will mention and explain its advantages and disadvantages.
- It increases the capital of the company, with low production costs, it gives the freedom to invest in other aspects for the development of the company, this can attract the attention of new investors, who see growth on the part of the company.
- It gives a more stable position in business, having a leadership in low costs cushions the problems that a financial crisis would bring.
- It generates a greater participation in the market, by having low prices, there is usually an expansion towards buyers with a reduced budget. Even over time, this lower price attracts more buyers who are looking for the best offer in the market, which is the lowest price.
What are the disadvantages of using the cost leadership strategy?
Although this advantage brings a variety of advantages to a company, being used by some, it also has not so positive points, which can present a risk for the company. To avoid suffering from these problems, we will mention and explain some of them, hoping that they will be useful in the company’s strategy.
- The company that opts for this strategy usually has problems adapting to changes. They can be technological changes, which modify the processes causing the company’s experience to drop or changes in what consumers prefer, wanting products that are not in the price range managed by the company.
- Another disadvantage of low-cost leadership strategies is the appearance of competition with greater economic resources, such as a multinational company, which can create a price war and win for the capital it possesses.
- Finally, this strategy can be replicated by the competition, making it obsolete for the company that wants to use it. In addition, many companies that opt for this strategy bet everything on it, neglecting other fronts, which are just as important for the company.