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What Is Cost Leadership?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 17 September 2016
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Cost leadership is a type of approach that is used by many businesses to enhance their positions within the marketplace. The basic idea is to become a cost leader within that market by closely monitoring and controlling costs or expenses associated with the ongoing operation of the business enterprise. Doing so helps the business to be in a secure position in the event that a price war should erupt among competitors, while also increasing the chances of being able to maintain an equitable profit margin even when no type of pricing war is taking place.

With the process of cost leadership, the key is to evaluate the business model and make sure it is operating at the highest level of efficiency possible. This will involve assessing every aspect of the operation and eliminating waste and additional costs on an ongoing basis. Doing so will often entail obtaining raw materials for the lowest possible price that the company can command, managing labor costs effectively, and even streamlining the actual manufacturing process so that the highest possible percentage of those raw materials are used to produce goods that are fit for sale. From this perspective, reducing cost at every step in the business operation while still managing to maintain quality is of utmost importance.

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By using the basics of cost leadership to keep expenses as low as possible, the company is in a position to set its pricing at a level that is easily competitive with others in the marketplace, while still allowing the business to earn the greatest amount of profit possible. This approach further insulates the company from encountering severe difficulties during any type of price war that may occur. Since the company already has low operational costs, there is a good chance it can continue to operate as before, lower the prices for its goods slightly to hang onto its market share, and fare better than others who are not operating with the same approach to cost management.

The advantage of cost leadership is that during periods in which no price wars are taking place, the company is usually able to enjoy a significant return on each item produced for sale. Taking care to set prices that are likely to attract the attention of consumers but still within range to the pricing that is considered standard in the industry, a business can capture and maintain market share with relative ease. At the same time, the company using a cost leadership model is capable of earning profits that can be used to create a contingency fund for the future, expand the business operation, or in some other manner provide long-term benefits that keep the company viable for a number of years.

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