Advantages of the Cost-Leader Strategy

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Tight control of production and overhead costs are one technique to implement a cost-leadership strategy.
Tight control of production and overhead costs are one technique to implement a cost-leadership strategy. (Image: Thinkstock Images/Comstock/Getty Images)

A cost-leadership strategy is a broad approach to business whereby a significant aspect of a company's strategy is an effort to operate as the lowest-cost business in its industry. Cost-leadership is among several general business strategies developed by author and well-known business management guru Michael Porter.

Higher Profitability

One benefit available to low-cost operators in an industry is higher profit margins. If you can sell products and services with a lower cost basis and competitive pricing, your margins are greater than companies that invest more to produce products of a similar quality. In essence, one option for a low-cost leader is to achieve more earnings from their products than competitors with higher costs.

Increased Market SHare

An alternative to leveraging cost-leadership to earn higher profits is to use it to increase customer demand and market share. Companies that are able to offer products at a lower-than-typical market price can usually induce more business from budget-conscious buyers. They are still able to generate industry standard profit because of their low cost basis. Over time, a lower price point draws in more customers looking for the same product, but wanting a better deal than others in the market offer.

Sustainability

Companies that have low-cost leadership are also typically in a more sustainable business position. During tough economic times, downturns in a given industry or when price wars beat down price potential, companies with lower costs of doing business have a better chance of survival, indicates the "Quick MBA" website. Optimized efficiency and outsourcing, low-cost supplier relationships and vertical integration achieved by participating in both manufacturer and reselling activities are low-cost tactics that are sometimes difficult for competitors to replicate.

Capital for Growth

Another major benefit of low-cost leadership is that you have more capital resources available to fund growth or further investments. If basic operating costs are low, you can put more money into research and development, technology upgrades and other business expansion. Some companies may even use available funds to promote new or untapped market segments. Growth and new investment also appeal to a public company's shareholders that like to see free cash flow being reinvested.

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