Cost Leadership And Porter’s Competitive Advantage

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 of 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 differentiation.

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 vs differentiation vs focused

Cost leadership, differentiation, and focused are three generic strategies first described by Michael Porter in his 1985 book Competitive Advantage: Creating and Sustaining Superior Performance.

In his book, “Competitive Advantage,” in 1985, Porter conceptualized the concept of competitive advantage, by looking at two key aspects. Industry attractiveness, and the company’s strategic positioning. The latter, according to Porter, can be achieved either via cost leadership, differentiation, or focus.

Porter posited that the relative position of a firm within an industry determined whether its profitability was above or below the industry average.

Profit that was consistently above average could result in sustainable competitive advantage, which Porter noted could be attained via low-cost products or differentiation of some kind.

When these sources of competitive advantage are combined with the scope of business activities that support them, three strategies for obtaining above-average performance emerge.

Cost leadership

The cost leadership strategy offers two choices for businesses:

  1. Reduce costs to increase profits whilst selling products at industry-average prices.
  2. Reduce costs to increase market share whilst still making a worthwhile profit.

Note that cost leadership is only concerned with minimizing the cost of delivering a product or service. The price that is paid by the consumer is covered is irrelevant.

Cost leadership is only effective for companies that offer the lowest prices in their industry.

Those that sell above these prices are more likely to be undercut by their competitors, which hinders their ability to increase market share.

As a result, cost leadership tends to be associated with various characteristics of market-leading companies, such as:

  • Economies of scale.
  • Access to abundant capital for investment in new technologies.
  • A low-cost base in terms of raw materials, labor, and infrastructure.


This strategy calls on the business to differentiate itself from the competition.

Products and services with superior features, durability, support, or functionality are the most obvious form of differentiation, but a company may also stand out in the following ways:

  • High brand equity and recognition among consumers.
  • Industry-wide product distribution that occurs via all major channels.
  • Effective marketing strategies, incorporating such things as ads and sponsorships.

The differentiation strategy can be further divided into three sub-strategies:

Sophistication (higher prices, higher perceived value)

This form is common in the auto industry.

Mercedes differentiates itself on status and luxury, while Toyota can charge more because of the reliability of its vehicles and TQM customer satisfaction approach.

The Total Quality Management (TQM) framework is a technique based on the premise that employees continuously work on their ability to provide value to customers. Importantly, the word “total” means that all employees are involved in the process – regardless of whether they work in development, production, or fulfillment.

Purification (lower prices, lower perceived value)

Such as budget airline EasyJet or Indian automotive multinational Tata.

Hybrid (lower prices, higher perceived value)

The best example of hybrid differentiation is IKEA, which can sell affordable furniture thanks to its extremely efficient supply chain management.


The focused strategy is normally used by small and medium-sized companies.

Unable to compete on price or differentiation in the broader market, these companies focus on a particular niche market and take the time to understand the target audience in detail.

They tend to build a smaller but no less devoted following, which makes niche entry unattractive to a larger competitor.

It’s important to note that focus on its own is not enough to sustain a competitive advantage.

Once a business enters a niche, it must choose either the price or differentiation strategy

Southwest Airlines is one example of a company utilizing a focused competitive strategy.

Instead of adopting the hub-and-spoke approach of its larger North American counterparts, the company sells short-haul point-to-point flights on less popular routes.

RyanAir Cost leadership example

RyanAir is an oft-cited example of cost leadership, and for good reason.

The budget airline carried more international passengers than any other airline in 2016 and in 2022, broke a monthly company record by transporting 15.4 million passengers.

RyanAir outperforms its competitors by selling air travel at the lowest unit cost possible.

To that end, the airline has the following characteristics:

Superior bargaining power over suppliers

This minimizes operating costs.

Little aircraft differentiation

Ryanair mostly utilizes the Boeing 737 which streamlines procedures and enables the company to order spare parts in bulk to save money.

Superior negotiation position with airport operators

This is due to RyanAir serving less popular airports and its ability to secure lower airport fees and taxes.

Lack of services that provide differentiation

Such as free food, in-flight entertainment, premium seating, and airport lounges.

McDonald’s Cost leadership example

No list of cost leadership examples would be complete without McDonald’s. Cost leadership in the restaurant chain is facilitated by:

Rapid food delivery

In essence, McDonald’s can serve more customers in an hour than its competitors.

The process of making a hamburger, for instance, has been simplified and optimized over the years so that any employee can learn it quickly.

Employee recruitment and training

McDonald’s is known to recruit teenagers who are often applying for their first job.

Hiring inexperienced staff as opposed to trained cooks means the company can pay a lower wage.

Vertical integration

Compared to some of its competitors, McDonald’s favors vertical integration.

The company owns the facilities that produce standardized ingredient mixes for its menu items.

It also grows its own beef via contracted producers and handles its own product transportation.

Lidl Cost leadership example

Lidl is a German discount supermarket that operates almost 12,000 stores across 31 countries.

Much of the company’s success is due to the low-cost business model that has allowed it to prosper in the fiercely competitive retail industry.

The company’s cost leadership strategy is underpinned by the following factors:

Cost minimization

To save money, Lidl uses natural light to illuminate its supermarkets whenever possible.

Relative to its peers, the company also spends less on advertising and marketing campaigns.

Lower labor costs

Lidl stores also tend to be more sparsely staffed than some competitors.

Employees are trained to work in a variety of roles or departments, and store inventory is handled by automated technology that reduces the need for human intervention.

Limited product selection

Lidl sells around 2,000 different products in each store, which is considerably less than the 20,000 found in a typical grocery store.

This allows the company to order items in bulk and increase its buying power with suppliers.

Private-label brands

Of those 2,000 products, around 90% are private-label brands produced for Lidl only.

By removing the middleman and having greater control over manufacturing costs, the company can save money and also sell its products for a higher margin than brand-name equivalents.

Primark Cost leadership example

Primark is a fast fashion retail chain with over 400 stores across 14 countries. The company is able to offer extremely low prices and undercut competitors thanks to its low operational costs.

Costs are minimized with the following strategies:

Large inventory

Primark purchases items in bulk which allows it to access the benefits of economies of scale.

Supply chain efficiency

Every company strives for supply chain efficiency, but Primark takes it one step further.

One example is the digitization of its customs clearance and distribution network which decreases the time it takes for items to reach its warehouses and customers.


Most Primark fashion items are made in countries with extremely low labor costs such as India, Bangladesh, China, and Pakistan.

Scaled-back branding and advertising

Primark mostly relies on word-of-mouth and social media to increase awareness of its brand and drive sales.

It does not spend money on more expensive channels.

IKEA Cost leadership example

With its flat-pack range of do-it-yourself furniture, it may come as no surprise that IKEA is a price leader in its industry.

This is how the Scandinavian company manages to stay ahead of the competition:

Products that require self-assembly

Since IKEA requires that customers assemble their own furniture, it avoids having to pay employees to do it for them.

Cleverly, IKEA does offer a paid assembly service for customers who can’t be bothered.

Product standardization

IKEA does not make personal or unique products with just 9,500 items in its range. While not a direct comparison, consider that the average Walmart Supercenter carries around 142,000 different products.

With a less diverse range, IKEA can produce more of each type and achieve economies of scale.


Like Primark, IKEA outsources the manufacturing of its products to countries with lower labor costs.

The company’s largest factory for wood-based products is in Poland, while 22% of the entire product range is manufactured in China.

Tim Hortons Cost leadership example

Tim Hortons is a Canadian multinational coffee and restaurant chain.

Most of the company’s 5,000 or so stores are in Canada, but there are also franchise agreements in 13 other countries such as the UAE, Spain, Thailand, and China.

Tim Hortons’ cost leadership strategy has the following components:

Centralized production

In each Tim Hortons restaurant, for example, pastries and similar products are not baked on site but instead manufactured at a central facility and then transported frozen.

Vertical integration

According to its website, Tim Hortons is “leveraging significant levels of vertical integration that exist in our system and continually exploring additional system benefits through further vertical integration opportunities.

To that end, the company owns warehouse and distribution operations that supply dry goods and paper to most of its Canadian restaurants. It also owns coffee-roasting plants in New York State and Ontario.

The company’s significant vertical integration results in more control over costs, reduced supplier bargaining power, and interdepartmental synergies.

Economies scale

The combination of centralized production, warehousing, distribution, and vertical integration enables Tim Hortons to benefit from pecuniary economies of scale.

These benefits arise from paying less for factors used in production and distribution such as raw materials and transportation.

Key takeaways

  • Cost leadership, product differentiation, and cost focus are three generic strategies first described by Michael Porter in 1985.
  • The cost leadership strategy involves reducing prices to increase profits or market share and is suitable for companies that offer the lowest prices in their industry. The differentiation strategy calls on the business to differentiate itself from the competition via superior products, brand equity, distribution, or marketing nous.
  • The focused strategy tends to be used by small and medium-sized companies that are unable to compete on price or differentiate themselves in larger markets. Instead, they focus on building a loyal following in a particular niche.

Other cost leadership examples


Amazon mission statement is to “serve consumers through online and physical stores and focus on selection, price, and convenience.” Amazon vision statement is “to be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavors to offer its customers the lowest possible prices.” 
Amazon runs a platform business model as a core model with several business units within. Some units, like Prime and the Advertising business, are highly tied to the e-commerce platform. For instance, Prime helps Amazon reward repeat customers, thus enhancing its platform business. Other units, like AWS, helped improve Amazon’s tech infrastructure.


By the end of World War II, Theo and Karl Albrecht took over the small grocery store of their mother to make it become one of the most successful discount supermarket chains in the world. ALDI operates according to the  motto “the best quality at the lowest price.” The company generated €24.2 billion in revenues in 2020.

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).


Walmart’smission can be summarized as “helping people around the world save money and live better – anytime and anywhere – in retail stores and through eCommerce.” While its vision is to “make every day easier for busy families.” Walmart defines “busy families” as the bull’s eye of its business strategy.

Connected Strategy Frameworks


The ADKAR model is a management tool designed to assist employees and businesses in transitioning through organizational change. To maximize the chances of employees embracing change, the ADKAR model was developed by author and engineer Jeff Hiatt in 2003. The model seeks to guide people through the change process and importantly, ensure that people do not revert to habitual ways of operating after some time has passed.

Ansoff Matrix

You can use the Ansoff Matrix as a strategic framework to understand what growth strategy is more suited based on the market context. Developed by mathematician and business manager Igor Ansoff, it assumes a growth strategy can be derived from whether the market is new or existing, and whether the product is new or existing.

Business Model Canvas

The business model canvas is a framework proposed by Alexander Osterwalder and Yves Pigneur in Busines Model Generation enabling the design of business models through nine building blocks comprising: key partners, key activities, value propositions, customer relationships, customer segments, critical resources, channels, cost structure, and revenue streams.

Lean Startup Canvas

The lean startup canvas is an adaptation by Ash Maurya of the business model canvas by Alexander Osterwalder, which adds a layer that focuses on problems, solutions, key metrics, unfair advantage based, and a unique value proposition. Thus, starting from mastering the problem rather than the solution.

Blitzscaling Canvas

The Blitzscaling business model canvas is a model based on the concept of Blitzscaling, which is a particular process of massive growth under uncertainty, and that prioritizes speed over efficiency and focuses on market domination to create a first-scaler advantage in a scenario of uncertainty.

Blue Ocean Strategy

A blue ocean is a strategy where the boundaries of existing markets are redefined, and new uncontested markets are created. At its core, there is value innovation, for which uncontested markets are created, where competition is made irrelevant. And the cost-value trade-off is broken. Thus, companies following a blue ocean strategy offer much more value at a lower cost for the end customers.

Business Analysis Framework

Business analysis is a research discipline that helps driving change within an organization by identifying the key elements and processes that drive value. Business analysis can also be used in Identifying new business opportunities or how to take advantage of existing business opportunities to grow your business in the marketplace.

BCG Matrix

In the 1970s, Bruce D. Henderson, founder of the Boston Consulting Group, came up with The Product Portfolio (aka BCG Matrix, or Growth-share Matrix), which would look at a successful business product portfolio based on potential growth and market shares. It divided products into four main categories: cash cows, pets (dogs), question marks, and stars.

Balanced Scorecard

First proposed by accounting academic Robert Kaplan, the balanced scorecard is a management system that allows an organization to focus on big-picture strategic goals. The four perspectives of the balanced scorecard include financial, customer, business process, and organizational capacity. From there, according to the balanced scorecard, it’s possible to have a holistic view of the business.

Blue Ocean Strategy 

A blue ocean is a strategy where the boundaries of existing markets are redefined, and new uncontested markets are created. At its core, there is value innovation, for which uncontested markets are created, where competition is made irrelevant. And the cost-value trade-off is broken. Thus, companies following a blue ocean strategy offer much more value at a lower cost for the end customers.

GAP Analysis

A gap analysis helps an organization assess its alignment with strategic objectives to determine whether the current execution is in line with the company’s mission and long-term vision. Gap analyses then help reach a target performance by assisting organizations to use their resources better. A good gap analysis is a powerful tool to improve execution.

GE McKinsey Model

The GE McKinsey Matrix was developed in the 1970s after General Electric asked its consultant McKinsey to develop a portfolio management model. This matrix is a strategy tool that provides guidance on how a corporation should prioritize its investments among its business units, leading to three possible scenarios: invest, protect, harvest, and divest.

McKinsey 7-S Model

The McKinsey 7-S Model was developed in the late 1970s by Robert Waterman and Thomas Peters, who were consultants at McKinsey & Company. Waterman and Peters created seven key internal elements that inform a business of how well positioned it is to achieve its goals, based on three hard elements and four soft elements.

McKinsey’s Seven Degrees

McKinsey’s Seven Degrees of Freedom for Growth is a strategy tool. Developed by partners at McKinsey and Company, the tool helps businesses understand which opportunities will contribute to expansion, and therefore it helps to prioritize those initiatives.

McKinsey Horizon Model

The McKinsey Horizon Model helps a business focus on innovation and growth. The model is a strategy framework divided into three broad categories, otherwise known as horizons. Thus, the framework is sometimes referred to as McKinsey’s Three Horizons of Growth.

Porter’s Five Forces

Porter’s Five Forces is a model that helps organizations to gain a better understanding of their industries and competition. Published for the first time by Professor Michael Porter in his book “Competitive Strategy” in the 1980s. The model breaks down industries and markets by analyzing them through five forces.

Porter’s Generic Strategies

According to Michael Porter, a competitive advantage, in a given industry could be pursued in two key ways: low cost (cost leadership), or differentiation. A third generic strategy is focus. According to Porter a failure to do so would end up stuck in the middle scenario, where the company will not retain a long-term competitive advantage.

Porter’s Value Chain Model

In his 1985 book Competitive Advantage, Porter explains that a value chain is a collection of processes that a company performs to create value for its consumers. As a result, he asserts that value chain analysis is directly linked to competitive advantage. Porter’s Value Chain Model is a strategic management tool developed by Harvard Business School professor Michael Porter. The tool analyses a company’s value chain – defined as the combination of processes that the company uses to make money.

Porter’s Diamond Model

Porter’s Diamond Model is a diamond-shaped framework that explains why specific industries in a nation become internationally competitive while those in other nations do not. The model was first published in Michael Porter’s 1990 book The Competitive Advantage of Nations. This framework looks at the firm strategy, structure/rivalry, factor conditions, demand conditions, related and supporting industries.

SWOT Analysis

A SWOT Analysis is a framework used for evaluating the business‘s Strengths, Weaknesses, Opportunities, and Threats. It can aid in identifying the problematic areas of your business so that you can maximize your opportunities. It will also alert you to the challenges your organization might face in the future.

PESTEL Analysis


Scenario Planning

Businesses use scenario planning to make assumptions on future events and how their respective business environments may change in response to those future events. Therefore, scenario planning identifies specific uncertainties – or different realities and how they might affect future business operations. Scenario planning attempts at better strategic decision making by avoiding two pitfalls: underprediction, and overprediction.

STEEPLE Analysis

The STEEPLE analysis is a variation of the STEEP analysis. Where the step analysis comprises socio-cultural, technological, economic, environmental/ecological, and political factors as the base of the analysis. The STEEPLE analysis adds other two factors such as Legal and Ethical.

SWOT Analysis

A SWOT Analysis is a framework used for evaluating the business’s Strengths, Weaknesses, Opportunities, and Threats. It can aid in identifying the problematic areas of your business so that you can maximize your opportunities. It will also alert you to the challenges your organization might face in the future.

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