Setting Goals For Your Low-Cost Leadership Company Is Critical
Every business needs a strategy. So, today let’s drill down on cost leadership companies. And how they go about their business.
With an emphasis on understanding what it means to be a low-cost leader. And setting the right business goals to make it happen.
Let’s get started…
10 Examples of Goals for Cost Leadership Companies
Here are our top 10 goals every company choosing a cost leadership business strategy should set and achieve:
- Decrease expenses
- Improve productivity
- Increase asset utilization
- Make smart investments
- Migrate to better technologies
- Increase employee skills
- Learn to collaborate more effectively
- Optimize product and service pricing
- Increase market share
- Target the right quality level
We will cover each of these in just a moment. But first, please allow me to lay in a little foundation information…
Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.
What is a cost leadership business strategy?
Cost leadership is one of 3 business strategies described by Michael Porter. They are:
1. Differentiation strategy
Creating unique and innovative products and services.
2. Focus strategy
Offering specialized services or products in a niche market.
3. Cost Leadership strategy
A no-frills low-cost approach to serving customers.
Approaching a low-cost leadership strategy for your company – keep it simple
In theory, every company, whether they know it or not emphasizes one of these generic strategies.
And what I like about Porter’s approach to strategic management is its simplicity. Because I sat in far too many confusing strategy sessions at past companies where I worked.
They were usually led by a consultant wanting to maximize his or her fees. Thus, they desired to create a strategy, and the means to execute it, more complex than necessary.
Thus, my goal is to keep it simple.
So you can decide if being the low-cost leader is right for your company. And, if it is, how to go about it making it happen.
Thus, no high-priced strategy consultants are required!
Related reading: Non-financial business KPIs to consider
Next, let’s drill down a little deeper…
What are cost leadership companies?
Cost leadership companies seek to serve their customers at the lowest possible cost. While maintaining their stated standards for quality and customer service.
But don’t confuse cost leaders with companies offering the lowest prices.
Because all companies ultimately seek to charge the highest price the market will bear. Without destroying demand for their product or service over the long run.
Thus, from my perspective, pricing isn’t a business strategy. It is a means to achieve business objectives.
Related reading: Best financial goals for your business
Examples of companies that use cost leadership strategy
Next, let’s look at some cost leadership examples. To see this strategy at work in real businesses…
McDonald’s cost leadership strategy
First of all, through backward integration, McDonald’s controls its supply chain. Thus reducing raw material costs.
Furthermore, by simplifying and automating processes, the company reduces labor hours. And labor rates.
I like a good hamburger. And over the last couple of months…
I paid $15 for a hamburger at a local sit-down brewpub and restaurant.
It was a high-end burger for sure. And nice dining experience. But way too expensive for my taste.
At Culver’s, I had a nice double cheeseburger that cost me about 6 or 7 bucks.
It was very good. With high-quality beef, cheese, and other ingredients. The best value of these 3 options, in my opinion.
And finally, I had a McDonald’s double cheeseburger that cost $2.50.
It wasn’t bad actually. And the experience met both my quality and service expectations.
But there was no question in my mind based on these experiences. McDonald’s is a low-cost no-frills producer.
Related reading: Goal setting for employees
Here’s another example…
Aldi cost leadership strategy
Have you ever shopped at Aldi? If so, you know it’s a no-frills operation.
According to Taste of Home, the company maintains rock bottom prices by…
- Avoiding brand name products
- Keeping product selection to a minimum
- Not offering prepared foods
- Stocking products in boxes and crates
- Requiring customers to supply their bags
- Requiring refundable deposits on carts
…just to name a few of their techniques.
In contrast, I used to live by a high-end specialty grocery store…
It stocked beautifully prepared foods, and butchers prepared top-quality cuts of meat. The cases and counters had the freshest seafood and produce.
My local store was not competing on cost like Aldi. They were pursuing a differentiation strategy.
Related reading: Short-term goals every business should have
Other low-cost leadership companies
Of course, there are many more cost leadership examples.
A few famous cost leaders that come to mind include:
- RyanAir for budget air travel
- Walmart’s cost leadership strategy in retail
- IKEA cost leadership competitive strategy in furnishings
- Amazon in the online retail and distribution space
What do all of these companies have in common?
First of all, they provide goods and services that have consistent demand. Furthermore, they provide those goods and services with a minimum of “bells and whistles”. Finally, they scale their operations to maximum efficiency.
Okay. So that’s all well and good.
But this isn’t an academic exercise. This is about helping you turn your cost leadership business strategy into reality at your company.
How is it done? That’s simple.
Set the right company goals and achieve those goals.
How to transform your company into a low-cost leader using business goals
So, here are 10 business goals every cost leader should have…
Decrease expenses
Go through a list of your expense for the past year.
Then, eliminate any unnecessary costs. And look for ways to reduce others.
Don’t put all of this on your finance department. Get everyone in the company involved.
Improve productivity
Productivity is about either getting the same amount of work done with fewer resources. Or, getting more work done faster with the same resources.
To do so, look at your business processes. And eliminate any that are unnecessary. Then streamline and make more efficient all of the others.
Increase asset utilization
Analyze your business to identify its key productive assets. You will find a mix of facilities, equipment, technology, and people.
Absorb as much of that capacity as possible with new business before investing in new capabilities. Utilizing excess capacity is especially important for manufacturing businesses because they are capital-intensive.
Doing so means you will produce more of whatever it is you do. At the lowest possible cost.
Make smart investments
However, don’t be “penny wise and pound foolish.” Identify business investments with good returns.
Because sometimes it requires significant upfront investments. To operate at the lowest cost.
Migrate to better technologies
In some way, every company is a tech company. Even if that company doesn’t produce technology products.
So, look for ways your company can invest in and use technology. To lower costs across your system.
Increase employee skills
Well-trained employees are the most efficient employees. So, don’t skimp on employee training and development.
Then unleash them on improving your business processes.
Learn to collaborate more effectively
And the same goes for collaboration. Because employees that work well together are much more efficient than those who do not.
So, break down the silos. Set goals for your key managers to do so.
Then, hire and train confident employees. The ones that won’t waste their time trying to justify their jobs and protect their turf.
Optimize product and service pricing
I said it before and I will say it again. Being a low-cost leader does not necessarily mean competing by offering the lowest prices.
So, look at your pricing and price to what the market will bear. Be careful not to price so high as to destroy demand for your products and services.
For example, perhaps McDonald’s could charge $2.99 for that double cheeseburger. Versus $2.49.
Increase market share
Furthermore, use low prices to increase market share and build customer loyalty. Operating at a low cost allows you to do so.
If and when you think that increasing market share is the best approach to growth. That way, your small business can be a more successful business with a greater scale.
This is an excellent approach. Especially in highly fragmented markets.
Target the right quality level
Cost leadership companies do not sell poor-quality products and services. No way. That’s not a formula for long-term prosperity.
What they do is set quality expectations with their customer. Then meet those expectations every day.
For example, I know when I walk into an Aldi what I’m in for. A low-cost, no-frills shopping experience. And I can live with that.
However, if I walked into the specialty grocery store near my home that I spoke of earlier. And had an Aldi-like shopping experience. I doubt I would ever go back.
So, let me repeat. Low-cost leaders tend not to produce low-quality products and services.
What they do is this: set quality expectations and meet them!
Okay. That completes my review of 10 cost leadership company goals.
Next, let’s talk about some of the advantages and disadvantages of pursuing a low-cost leadership strategy…
Pros and cons of cost leadership companies
Being generally a positive person. I would like to start with the advantages of being a low-cost leader…
Flexibility with pricing
Sometimes you will need or want to lower prices…
- To gain market share
- Navigate a recession
- Deal with low-priced competition
- Introduce a new product
- Create barriers to entry
…to name a few possibilities.
And rock bottom operating cost provides the ability to do so. Without losing money.
Ability to handle difficult economic times
During recessionary periods, demand may fall. However, a low-cost leader will be better able to manage economic challenges.
Without having to lay off employees, or shed assets. Because the business is already operating as lean as can be.
Related reading: Intermediate-term goals for your company
Higher profits
By pricing to what the market will bear. Meaning the highest price possible that will not destroy demand.
Then by default, higher profits and higher profit margins will usually be the outcome. And you and I are in business to make the most profit possible. Right?
Next, allow me to address 3 disadvantages of running a low-cost leadership strategy at your company…
Quality can suffer
When cutting costs to the bone, product and service quality can suffer.
That’s why it’s so important to set and maintain quality standards at whatever cost necessary. Just be sure to be efficient at doing so.
Innovation may be limited
Let’s face it, being innovative costs money. Because it takes special people and processes to innovate.
In some cases, this is not a big problem, but in others, it can be. For example…
Lack of responsiveness to market changes
As your customers and markets change, innovation and responsiveness may be required.
So, I think the watch out is this: don’t cut costs for the sake of cutting costs. Look at your firm holistically.
If a certain level of innovation and responsiveness is required. Identify those requirements and fund them.
Just be efficient and practical about it. Because you aren’t in the business of pursuing a differentiation strategy. Where constant innovation is key.
No way. You are a successful low-cost leadership company!
Okay. That’s all I have for today.
So, allow me to wrap up with a few parting thoughts…
Conclusions about cost leadership companies
Every business needs a strategy! And pursuing a low-cost leadership business strategy is a great path to choose.
It is an excellent business approach for increasing market share during good times. And weathering challenges during times of economic difficulty.
Is it simple? Yes, but I’m not saying that it is easy.
So, be sure to achieve your goals related to the quality standards set with customers. And watch out for the times when your company needs to innovate and respond to changes in your target markets.
Regardless, good luck with your business. No matter what strategy you choose.
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Author Bio: Tom Scott founded the consulting and coaching firm Dividends Diversify, LLC. He leverages his expertise and decades of experience in goal setting, relocation assistance, and investing for long-term wealth to help clients reach their full potential.