Cost Leadership and Competitive Advantage

To gain competitive advantage, small businesses can focus on different strategies, including leadership in cost, quality, innovation or customer service. Strongest advantage comes through leadership in a factor that is important to customers and difficult for competitors to match. Cost leadership means that you are the producer with the lowest costs in your chosen market sector. That gives you the ability to set lower prices than competitors while offering customers the same benefits.

A cost leader does not have to set the lowest prices or engage in a price war, according to Fast Company. If you have a cost advantage, you can offer customers the same product quality or the same set of benefits at a price that matches the prices of your competitors. That represents value to your customers. Because your company has lower costs, you can continue to make profits while maintaining competitive prices.

Cost leadership also gives you flexibility if you deal with powerful buyers. If buyers demand increased quality, higher levels of service or lower prices, you can absorb those requests without damaging profitability, while your competitors may find it difficult to respond. That puts you in a strong position if you operate in a market where there is little product differentiation and many competitors. The same advantage applies if your suppliers want to raise their prices to you. Although that will increase your costs and lower your margins, you will still be in a position to absorb the rise.

When you have a clear cost advantage, you can create strong barriers to market entry. New entrants without your cost advantage would have to make a significant investment to match your prices while maintaining profitability. This is important in markets where customers can switch suppliers easily or where customers tend to shop around for lower prices.

Supply chain collaboration can strengthen your cost advantage, according to Quality Digest. By working with members to improve efficiency and reduce costs throughout the supply chain, you can create a sustainable cost advantage that competitors would find difficult to match with tactical price cuts.

When your company is the cost leader in your market sector, you have a choice of strategies. You can set your prices at the level of your competitors and maintain profitability or lower your prices and increase market share. Maintaining profitability gives you the opportunity to invest in further activities to strengthen your cost advantage or implement other growth strategies, such as developing new products or increasing your marketing budget.