Cost Leadership is an easy concept to understand, but it is not always easy to achieve. It is a competitive strategy designed to maximize profits by delivering the best possible product with the lowest possible production costs.
This strategy should not be confused with price leadership, which focuses on offering the lowest price to consumers. Retail giant Walmart has famously made this strategy the core of its business model, offering consumers convenience, affordability, and quality.
Price leadership can be advantageous for large retail chains and discount department stores, but often has a negative impact on small business, forcing local retailers to lower profit margin in order to remain competitive.
Cost leadership strives for higher profits at the same price offered by a competitor. Some cost leaders pass those savings on to customers, others use higher profit margins for different purposes.
Although small businesses are at a distinct disadvantage when it comes to bulk purchasing power, cost savings are attainable in other functional areas of operation. Low cost strategy requires comprehensive strategy and committed attention to detail. Here are three ways small businesses can offer big savings, while still delivering the quality their customers deserve.
1. Develop a Killer Procurement Strategy
Until fairly recently, procurement was one of those overlooked areas most businesses did not have a handle on. When big business realized how much value they could squeeze from procurement strategy, this became wildly popular.
Procurement, or purchasing, is more complex than buying what the business needs. Big businesses use an integrated approach that small businesses can emulate. The key to lowering costs is to control spending with smart sourcing strategies:
- Always research sources. Where big businesses save money by importing from cheap foreign sources, a smaller company may benefit from choosing local sources. Higher cost per item may be balanced by lower shipping and storage costs and a better quality product that sets one business apart from competitors.
- Thoroughly vet vendors. Before working with a supplier, make sure they have the manufacturing and supply chain capabilities to consistently meet your needs.
- Use just-in-time (JIT) inventory management strategy to eliminate storage costs and keep your stock as fresh as possible. This means only ordering and receiving inventory as needed.
- Develop ongoing relationships with suppliers. Treat preferred suppliers like the success partners they are.
- Leverage on-time payments to take full advantage of contract terms. Many suppliers offer early payment clauses, which can generate significant savings when certain terms are met.
- Use procurement software with data analysis to predict industry trends, keep track of merchandise or project milestones, and ensure that invoices match purchase orders and delivery slips before payment is made.
Small scale can work to your advantage. Successful entrepreneurs deliver customer experience down to the smallest detail. And for small business, this may mean limiting your goods or services to a single product or offering. Many have found success with a cookie-cutter approach and a well-documented process.
A home improvement contractor, for example, can specialize in bathrooms or kitchens, buy popular cabinets and countertops in bulk, and do the same job again and again with little customization. It's a win/win. The customer gets a well-designed custom kitchen and the contractor saves money on labor and materials.
Many successful businesses start out by doing one thing well, and then scale up to seize larger opportunities.
3. Boost Efficiency
Some businesses simply operate more efficiently. Their staff accomplishes more in less time. This is usually due to a combination of factors, including hiring the right people, comprehensive training, well-defined processes, and automation.
Implementing the right technology can lower costs by automating internal tasks and minimizing errors. Customer-facing technology can also help build stronger relationships where customers can check prices, find items and information, and take advantage of discounts and loyalty programs that inspire company loyalty.
The Bottom Line
While cost leadership has benefited big business in matching competitor prices, small business can readapt this strategy to remain competitive and grow. Good procurement, specialization and efficiency will enable entrepreneurs to take advantage of local networks, focus on quality, and maximize opportunities.