In 1980, the American academic Michael Porter described how a company pursues competitive advantage across its chosen market scope in the so-called Porter’s generic strategies. 40 years later, although with some slight modifications and new perspectives, they are still widely applicable to any size or form of business.
In the previous article, we discussed the strategy of differentiation along with some examples. Today, we will talk about another one – Cost Leadership, and we will see some of the best real-world Cost Leadership examples to help us understand the concept.
The essence of strategy is choosing what not to do. ~Michael Porter
But before we move on to the fun part – the Cost Leadership examples, there is one thing that we need to clear out. Or in other words, what does this strategy actually mean? How can a company achieve leadership in costs? Let’s find out:
What is Cost Leadership?
A company pursuing a Cost Leadership strategy aims to establish a competitive advantage by achieving the lowest operational costs in the industry.
For example, let’s imagine a company that’s manufacturing chairs. If the company would produce customized chairs for each particular customer, its operational costs would be really high. Why?
Because each chair will be ordered at a different time, with different materials and colours, and even the process or technology of its manufacturing might differ. The high level of customization would not allow the company to exploit scale of production nor standarized processes.
Now imagine that the same company is producing highly standarized chairs that all look the same, no matter the preferences of the client. This company would be able to improve its efficiency by leveraging economies of scale*, and lower production costs by using fewer and more simple, standard components.
*Economies of scale: cost advantages achieved by increasing production and lowering costs. As costs are spread over a larger number of goods, the cost per single unit decreases.
What is not Cost Leadership?
The Cost Leadership strategy is often confused with Price Leadership, but these are two different concepts. A company that has achieved the lowest production costs might not necessarily offer the lowest prices.
If that happens, then the company would have profit margins that are higher than the average. However, many businesses that pursue a Cost Leadership strategy usually compete on price as well, and they are very efficient at it due to low cost management and structure.
How can you establish a competitive advantage in costs?
And one last thing before we move on to our Cost Leadership examples, let’s zoom on some of the ways in which you can achieve this competitive advantage:
High asset utilization
In service industries, high asset utilization refers to maximizing the use of the service within a certain period of time. For example, a restaurant that turns tables around very quickly, having more customers that stay for shorter periods of time as opposed to another restaurant in which a table is occupied for hours at a time.
Another example could be a nail salon in which nails are done for 30 min instead of 60 min, serving more clients in a single day by reducing the time for delivering the service.
In industries that involve product manufacturing, high asset utilization involves the production of high volumes of output. This is usually achieved by producing large amounts of standardized products (mass production), leveraging the economies of scale that we talked about previously.
Low direct & indirect operating costs
Another consequence resulted by the production of high amounts of standardized products is the reduction of direct and indirect operating costs. Production costs are kept low by using fewer and more standard components.
However, other ways in which companies can achieve low operating costs is by paying low wages, renting offices and warehouses in low rent areas, minimizing advertising costs, outsourcing, etc.
For example, one way Ryanair manages to reduce costs is by landing at smaller, remote airports instead of the main ones – which are more expensive.
Value chain control
Another way of ensuring lower costs is to have a higher control over the value chain. The more functional groups a company watches closely, (supply/procurement, finance, inventory, IT, Marketing, etc.), the easier it is to control the operational processes.
And of course, the costs associated with them. For example, this could be negotiating lower prices with suppliers, applying competitive bidding for contracts, preferential access to raw materials, and so on.
Cost Leadership Examples
Thanks for the patience! 🙂 Now that we have a better understanding of this particular competitive strategy, let’s dive right into our Cost Leadership examples:
RyanAir is probably one of the most famous examples when it comes to cost leadership. Founded in 1984, the Irish based budget airline (with a fleet size of 469 airplanes including subsidiaries) carries more international passengers than any other airline in the world.
The company’s competitive advantage strategy is based on their intent to outperform competitors by providing air travel service at the lowest unit cost possible. This is achieved in a variety of ways, including:
- Considerable bargaining power over suppliers, which helps the company keep its operating costs low;
- Little aircraft variety (mainly Boeing 737-200), allowing them to purchase spare parts in large quantities;
- Negotiation power with airport operators, demanding low landing and handling fees, in addition to flying to less popular airports;
- Lack of differentiation services such as loyalty schemes, free food, in-flight entertainment, airport lounges, premium cabin, etc.
And others! The company’s competitive advantage strategy is especially attractive for price sensitive customers.
Next on our list of Cost Leadership examples is Walmart.
Walmart is a US multinational retail corporation that operates 11,484 supermarkets and discount stores across 27 countries. Its competitive advantage strategy is based on selling branded products at low costs, attracting the largest number of customers possible.
The company has been very effective at establishing a competitive advantage in costs in multiple ways, including:
- Achieving low operational costs through automation & technology;
- Minimized spending on human resources (including very low wages);
- Working closely with suppliers that dominate industry brands;
- Own fleet of 3,000 trucks & 12,000 trailers, cutting on outsourcing costs;
- And even meeting with vendors to help them cut their own costs, building a win-win relationship;
Additionally, Walmart implemented a satellite network system to share information through the company’s network of stores, distribution centers, and suppliers.
This system also helped them consolidate orders for goods, enabling Walmart to buy larger quantities at lower prices.
Our list of Cost Leadership examples continues with Primark, an Irish fast fashion retailer with 370 stores across 12 countries. The company offers rock bottom prices that undercut their competitors considerably, which is mainly possible due to their low operational costs.
When it comes to its competitive advantage strategy, Primark is doing some things differently than other brands. These thing allows them to achieve a leadership in costs in a highly competitive industry:
- Huge quantity of stock – by buying in bulk for all their stores, Primark manages to cut on costs and achieves the economies of scale that we talked about previously.
- Little branding and advertising – the company also spends little to no budget on advertising, relying mainly on their social media accounts and word of mouth.
- Efficient supply chain – Primark has streamlined its supply chain processes, ensuring that no extra costs occur through unnecessary activities.
- Reduced time-to-market – thanks to the company’s computerized custom clearance and strong warehousing and distribution network.
- Outsourcing – Primark outsources the manufacturing of its clothes to developing countries such as India, which offer cheaper labor.
Considering all these efficiencies and operational strategies, it is not a surprise that Primark has gained a significant competitive advantage through low costs.
Of course, there can’t be a list of Cost Leadership examples without one of the most famous brands in the fast food industry – McDonald’s. But how does the company achieve its competitive advantage?
Let’s take a look:
- Rapid delivery of food – McDonald’s has optimized the processes of cooking food, making them simple and easy to learn by all employees, reducing the learning curve as much as possible.
- Training – additionally, the company has a division of labour that allows them to recruit and train freshers as opposed to hiring already trained cooks, which allows them to pay low wages.
- Vertical integration – compared to competitors, McDonald’s owns the facilities that produce the the ingredient mixtures for their products, further minimizing its costs.
In other words, the company manages to cut costs not only when it comes to raw materials and optimized human resources, but also by high asset utilization – yes, the one we saw in the previous point.
Because they are able to produce and deliver the food as fast as possible, they are able to serve more clients as opposed to their competitors in the same amount of time.
Cost Leadership examples: IKEA
Needless to say, the famous Swedish furniture retailer has absolutely revolutionized the furniture industry.
By producing huge quantities of standardized products that people can actually assemble themselves, IKEA has gained a significant competitive advantage with its cost leadership strategy. Today, the multinational group operates 433 stores across 52 countries.
IKEA is an absolute leader in the furniture industry when it comes to low costs, and here is why:
- Standardized products – as opposed to competitors, IKEA doesn’t offer personalized products. Practically all of them are standardized, which allows the company to produce them in huge quantities for all of its stores worldwide. And achieve economies of scales that smaller competitors are just not able to.
- Self – assembly – the retailer seeks for suppliers who are able to manufacture quality subassemblies at the lowest costs possible, with customers having to assemble the furniture themselves. Which is one reason why their prices are so low, as IKEA doesn’t spend budget on employees for the assembly process. You could hire them additionally, but they are not included in the basic product price.
- Outsourcing – as many other companies do, IKEA also outsources the manufacturing of its products in low-wage countries, which allows them to cuts on costs additionally.
Interestingly enough, IKEA also follows a differentiation strategy to a certain extent, along with its cost leadership advantage. The company practically invented a completely new and innovative business model that people instantly loved.
Next on our list of Cost Leadership examples is the multinational king of ecommerce – Amazon. When it comes to Porter’s concept, the company’s core strategy is clearly cost leadership compared to other brick and mortar retailers.
Amazon achieves its competitive advantage in multiple ways, including:
- Economies of scale – the company has huge warehousing facilities and processing capability, thus being able to cut on costs through physical economies of scale.
- Advanced technology – by using advanced computing and networking technologies, Amazon achieves maximum operational efficiency (and minimized costs).
- Process automation – the company has managed to automate a lot of operational processes, including purchase processing and delivery scheduling, among others.
The main goal of Amazon is to develop a competitive advantage through continuous improvement of IT infrastructure. However, just as we saw with IKEA, the company is also achieving certain levels of differentiation as well.
For example, one way the company has managed to differentiate itself is through customer reviews and feedback, encouraging customers to buy more from Amazon.
Our list of Cost Leadership examples continues with Lidl, a German international discount supermarket chain that operates over 10 thousand stores across Europe and the USA. The company maintains a low cost business model which is a huge part of its success.
Here is how Lidl achieves its competitive advantage:
- Supply chain – by working closely with suppliers, the company aims to minimize supply chain costs. As a consequence, they are also able to offer lower prices for their customers.
- Private-label brands – according to Business Insider, 90% of the products in Lidl stores are private-label brands – in other words, products manufactured exclusively for the company. This allows Lidl to cut out the middleman, eliminating additional supplier costs.
- Limited product selection – Lidl offers a high volume of products, but across a limited selection of brands. This limited selection gives the company more buying power with its suppliers, as they offer bigger quantities of fewer brands for each product.
- Low labor costs – compared to other supermarkets, Lidl’s staffing is minimal, and employees are cross-trained to be able to work in any section. The company also has a very efficient technology and automation in the back room to minimize human interaction.
Additionally, the company cuts costs on things like lighting, having stores use natural light whenever possible. Lidl also doesn’t spend a lot on Marketing and advertising.
And that was all from me for today! Thank you for taking the time to read my article on Cost Leadership examples, and I hope to see you in the next one!