4.2.4 How can firms acquire advantages through generic strategies?

The Cost Leadership Strategy

Firms can acquire cost advantages 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. If competing firms are unable to lower their costs by a similar amount, a firm may be able to sustain a competitive advantage based on cost leadership.

Firms that are successful in cost leadership frequently show the following internal strengths:

  • Economies of scale: Usually, the product needs to be created in large volume, made available to a very large customer base and distributed through the most extensive distribution network possible. A cost leader normally enjoys substantial market share;
  • Capacity of investment: to make a significant investment in production assets may represents a barrier to entry that many firms may not surmount;
  • Efficient manufacturing: processes are focused on true product value, eliminating activities that do not contribute to delivering customer value;
  • Efficient distribution channels;
  • Favourable access to important inputs, such as raw materials, process engineering, technology, components, skills or the ready availability of cash to finance the purchase of the most efficient equipment;
  • Rigorous and ongoing attention to cost reduction. Low cost leaders often continually invest in technology and process reengineering that applies to all aspects of the business to strip out cost and maintain the cost-led edge over competitors. Processes that do not contribute towards cost reduction (or minimisation) may be outsourced to third parties.