According to Porter there are three core strategies for competitive positioning: cost leadership, differentiation and focus.
Cost leadership is straightforward, as the player rolling this out will become the lost-cost producer in the industry.
As Porter highlighted, a cost leader has to have a broad scope (and scale). Indeed, the broad scope is a key element fo cost leadership, in the first place.
A cost leader simply will be able to offer among the lowest priced products in the industry, because it achieved cost leadership.
Therefore, the cost-leader isn’t such because it started a price war. Quite the opposite, the cost leader is such, because thanks to its broad industry reach, efficiency, and scale, can sell its products at a lower price and yet make margins.
In short, the low priced product is the effect of cost leadership.
The cost leader has to keep an eye on differentiation as well. Thus, there isn’t a pure cost leader, meant able to be such without differenciation.
A cost leader has to be at least comparable or perceived as such, to enable the cost leader to have enough margins for long-term sustained advantage.
What are the key elements for cost leadership?
While the sources of cost advantage can vary, based on the structural characteristics of the industry, there are some elements that help to build up cost leadership.
- Economies of scale.
- Proprietary technology.
- Preferential access to raw materials.
- And more.
Cost leadership stems from industry dominance, as more cost leaders in the same industry, according to Porter, can lead to fierce competition and price wars.
Cost leadership examples
Aldi uses a set of strategies to keep its prices low while maintaining a high quality:
- Aldi lists 1,300 items in each store every day, which is very limited compared to other supermarket chains. That keeps waste to a minimum.
- Aldi also stocks a lot of their own brands, with some becoming successful, which lowers the sales and marketing cost.
- 90% of the products are Aldi-exclusive brands, which makes it easy for the chain to market them, with more flexibility on price and distribution.
- ALDI in a way retains a. self-service attitude, where customers bring their own bags or can buy reusable bags at the store. Also, they must bag their own groceries. This lower the costs of serving clients for the company compared to other chains.
- Limiting store hours and keeping their stores small (about 15,000-20,000 square feet).