Is Cost Leadership Strategy a Good Strategy in a Mass Market?

1) Is cost leadership strategy a good strategy in a mass market?

Cost leadership strategy is a good strategy in a mass market. It is one of the 3 Porter’s generic strategies developed by Michael Porter which is regularly utilized by businesses to accomplish and preserve competitive advantage.

Advantage of this is that firms get to achieve economies of scale through cost leadership strategy. For example, Wal-Mart during its early years was not recognized as a well-established retail player but then the company adopted cost leadership strategy and make efforts to reduce their costs. From the start, Wal-Mart controls strictly on its overhead costs and stores are set up in large building to minimize rental cost. The reduced costs that Wal-Mart generated was utilized on reinvesting in constructing facilities, modern business related equipment and the latest technology which helps the firm to preserve its cost leadership position (Tanwar, 2013). Thus, cost leadership strategy is a good strategy in a mass market in the case of Wal-Mart.

Porter said that cost leadership strategy gives firm the ability to defense against rivalry from competitors (Minarik, 2007). According to Valipour et al. (2012), if a firm adopts cost leadership strategy, the firm’s performance will increase. Example is the investigation of relationship between business strategies used affecting company performance. Based on their research, financial leverage and dividend payments will increase by adopting cost leadership strategy. This outcome of this result is the same as Barton and Gordon (1988) and O’Brien (2003)’s research. For instance, Air Asia which evade expenses such as switching off cabin lights at suitable time, not overheating in-flight ovens and so on managed to achieve a successful low-cost structure which enables it to charge lower prices to achieve high market share (Zhu, 2017). This strategy brought AirAsia to the position of leader in the Low Cost Carrier (LCC) market in several countries (Bambang Baroto et al., 2012). This suggests that cost leadership strategy have positive and significant impact on firm’s performance in a mass market.

Adopting this strategy benefit firms by reducing threats such as entry barriers and achieve lower overall cost position (Minarik, 2007). According to Frambach et al. (2003), cost leadership instead of customer oriented, it is more towards competitors oriented. Japan has successfully implemented this strategy. Toyota, for instance benefits with its remarkable competitiveness in delivery time, quality and most importantly cost reduction. This had impacted Toyota worldwide with additional cost to utilize from reducing unnecessary cost which increases their efficiency compared with their competitors and the ability to charge quality car at lower prices (Frambach et al., 2003). This proves that cost leadership strategy is a good strategy in the mass market.