STRATEGIC CHOICES OF COST LEADERSHIP

The strategic choices of a cost leader in terms of differentiation of the product market segmentation of the market and distinctive competency are:
Product Differentiation: The cost leader selects a low level of product differentiation. If the cost leader attempts to make its products unique, then its costs rise. The cost leader’s level of differentiation is not markedly inferior to that of the differentiator, but affordable at low cost. The cost leader does not attempt to be the industry leader in differentiation and does not provide a feature into the product until customers want it. For example, a cost leader does not introduce stereo sound in television sets until the customers demand it. 

Market Segmentation: Normally the cost leader does not choose for market segmentation. He positions his product to appeal to the average customer. This is because developing a line of products and meeting the needs of different market segments is an expensive proposition. The cost leader normally engages in only a limited amount of market segmentation.  As the company charges a lower price than its rivals, customers flock to its products.

Distinctive Competencies : The cost leader chooses to develop competencies to increase its efficiency and lower its costs compared to its competitors.The development of distinctive competencies in manufacturing and materials management is a major step in achieving lower cost. The cost leaders may attempt to ride down the experience curve to lower manufacturing costs. He chooses to develop skills in flexible manufacturing and efficient material management techniques. Therefore, the manufacturing and materials management functions are the center of attention in the cost-leadership company, and other function shape their distinctive competencies to meet the needs of manufacturing and materials management.

In addition to manufacturing and materials management, the cost leader may focus on HR and R& D functions to lower down costs. For example Nissan followed a cost leadership strategy in developing its midsize car, the Altima. Heinz is another example of a cost leader. Beans and canned vegetables do not allow much of a mark up. The profit comes from the large volume of cans sold. Therefore, Heinz  goes to extraordinary lengths to reduce costs. Another source of cost saving in pursuing cost leadership is the design of organization structure to match this strategy, since structure is a major source of a company’s costs.