Cost leadership styles focus on resource organization. The goal is to produce goods or services at the lowest possible cost by organizing every potential resource around the current production methods. Then, by achieving the lowest possible cost, the leader can place their team or organization into a position where the lowest price in the market is charged for needed goods or services.
Cost leadership looks for specific ways to reduce cost throughout their team. Nothing is off the table. Leaders will look to add experience, embrace economies of scale, change the supply chain, or employ lean manufacturing strategies.
This leadership style will also look for cost controls, overhead efficiencies, and cost minimization in all possible departments.
There are several advantages and disadvantages of cost leadership styles to consider if you’re thinking about bring in this type of leader to the workplace.
List of the Advantages of Cost Leadership Styles
1. It provides better profits for the team and organization.
Cost leadership styles are focused on creating low-cost operations within their market and industry. By reducing development and production costs, it becomes possible for higher profit margins to appear. When competitive pricing is available, with greater margins than what other companies are able to achieve, then you gain more business because you’re offering a stronger value proposition to your customers.
2. It can increase a team’s market share.
Not only do teams employing cost leadership styles achieve a higher profit margin, they are able to achieve an improved market share over time as well. Customers who are conscious about their budget balance the need for cost with the need for value. If your goods or services are at the lowest costs, but with an acceptable value, then your items will be considered for purchase first. Over time, these leaders can induce more business, even out of a mature market.
3. It improves the sustainability of the business.
When costs are lower for a business, then there are fewer financial threats that could put the organization out of business. This sustainability becomes a tremendous advantage when economic circumstances take a turn for the worst. When a price or trade war happens, or there is a downturn in the local economy, it is the companies with the lowest cost of doing business that will have the greatest chance at survival.
4. It creates more capital that can be used for growth.
Cost leadership styles also promote the availability of more capital resources. Even though the retail cost of goods or services are low, the higher margins make it possible to retain capital from each transaction. Over time, this creates a nest egg of resources that can be used for multiple purposes. Many organizations which feature low-cost leadership will use the additional capital to either further their investments or fund new growth.
5. It reduces competition from the marketplace.
Companies that are able to implement their cost leadership styles successfully give themselves a future advantage as well. Because they are able to offer a superior pricing model to their consumers, new competition in the market is limited because competitors may struggle to achieve the same price. Unless competitors are willing to undercut the company employing cost leadership, it becomes almost impossible to survive. That allows for market domination over time.
List of the Disadvantages of Cost Leadership Styles
1. It can cause financial cuts in critical areas that harm the business.
It is a worthy goal to maintain a low-cost position. Many leaders following this style will find ways where money can be saved from the current budget. There is also a danger here that some cost leaders may look to reduce costs in critical areas of the company, like in their customer service division. Although the price is nice for the consumer, the customers who incorporate the value of customer service into their value calculations will stay away from this company.
2. It reduces product innovation.
One of the first cuts that always tends to happen with the cost leadership styles is in research and development. To many of these leaders, R&D seems like an extraneous cost. The outcome of cutting funding here is that there are fewer new products or services reaching the market. There are fewer chances at innovation. Instead, this leadership style encourages the same products to be sold at lower prices only.
3. It reduces the importance of consumer feedback.
When leaders are focused primarily on the price of the goods or services being offered, then it becomes easy to ignore how the market shifts over time. Customers are always evolving their preferences and taste for certain items. If the sole focus is to maintain a service or product and just reduce its cost, you’ll find that some customers will pay more to go with a competitive product because it is better able to meet their needs.
4. It is a technique that is quickly followed by others.
The benefits of the cost leadership styles are almost always temporary. Once one company begins to see the benefits of cutting costs to create a higher profit margin, everyone else begins to copy the techniques being used to lower their prices as well. Even if money is invested into research and development to counter this issue, new technologies become obsolete in a few years anyway. That means cost leadership most always be active for it to be effective.
5. It encourages a lower quality product to be offered to the market.
Being able to cut costs is not an easy process. Once leaders find the obvious items that can be cut, the real work of cost leadership begins. It may require a lower quality set of ingredients or raw materials to create a higher profit margin. There may need to be a change to the advertising or marketing budget, which could reduce the number of new customers obtained. Some companies may even choose to pay their workers less if labor costs are one of their primary expenses.
6. It cannot be applied to every product or service.
The goal of cost leadership is to cut production costs, while still producing an acceptable product, that meets the basic needs of the consumer. An acceptable product is different than an exemplary product. For an elite brand, such as Apple, a process that involves cost leadership is almost certain to backfire. There is an expected standard in the product that must be met for consumers to engage with the brand. Almost all forms of cost leadership involve some type of quality reduction.
7. It requires a large volume of sales to be successful.
Cost leadership is most successful when it is able to generate a large volume of sales. That is how the organization is able to maintain its overall profitability. That’s why it is usually employed by companies that are able to work on large economies of scale. You’ll find cost leadership at work throughout a Walmart or a Costco. You won’t find it at work at your local Mom and Pop stores or small chains.
8. It requires capital that may not be available.
Cost leadership styles present organizations with a make-it-or-break-it gamble. You must be able to achieve a large volume of sales, while applying operational scaling, before you run out of money. If the leadership is unable to achieve sustainability before their capital reserves are depleted, then there is a good chance that the company could find itself filing for bankruptcy protections in the near future.
9. It disregards the time and importance of market research.
Cost leadership looks at one value transaction only: cost. It assumes that the goods or services being produced are needed by the local market. That means no time is spent on creating detailed market research about how a community will respond to what is being offered. Companies employing cost leadership styles are also more susceptible to environmental changes which occur because of cost cutting measures. Sudden market changes are especially problematic, as the company will have minimal maneuverability and slower reaction times.
The advantages and disadvantages of the cost leadership styles show us that this process can be used to create a unique competitive advantage. It will also reduce the speed to which an organization is able to adapt to changing circumstances. To be effective, cost leadership must be carefully managed to generate the profits that are possible. There is a significant risk taken with this approach that even a deep understanding of internal functioning cannot lessen.
Keith Miller has over 25 years of experience as a CEO and serial entrepreneur. As an entrepreneur, he has founded several multi-million dollar companies. As a writer, Keith's work has been mentioned in CIO Magazine, Workable, BizTech, and The Charlotte Observer. If you have any questions about the content of this blog post, then please send our content editing team a message here.