The goal of cost leadership is simple: position a business as a competitive low-cost leader in the market. This means offering quality products at a price that’s appealing to consumers. It also involves the company making profit increases through cost-cutting strategies.
What Is Cost Leadership?
Cost leadership is the process by which a company evaluates its value and supply chains to make cost-saving modifications.
Effective cost leadership looks to streamline the supply process by cutting costs throughout the process. An effective way for businesses to save money, cost leadership has proven a popular business strategy. This strategy could be of particular importance for eCommerce Startup Businesses.
It’s important to note here that these must be quality products. Simply cutting costs by offering a worse quality product does not constitute cost leadership.
When discussing cost leadership, we’re referring only to measures that reduce production and supply costs while maintaining the same quality of the product. A shift in product quality fundamentally changes a business’s competition, while cost leadership refers to outpacing current competitors with a cost-reducing strategy.
One of the most effective cost leadership strategies works to cut the middleman from the supply chain.
What Is a Middleman?
According to Investopedia the term business middleman is an informal word for an intermediary in a transaction or process chain. A middleman will facilitate interaction between parties, typically for a commission or fee. Some critics say that businesses and customers should try to “cut out the middleman” by dealing directly with each other, avoiding any increased costs or commissions.
In other words, middlemen connect suppliers with consumers who may be interested in buying their products—but they come at a cost.
While having a middleman can certainly boost a company’s sales, it incurs an additional cost as middlemen takes a commission of what’s being sold.
Let’s take a look at an example of a common middleman: a real estate agent.
A real estate agent is an effective middleman connecting homeowners and manufacturers with potential buyers.
Perhaps the most famous middleman of all, however, is Walmart. Walmart may be classified as a middleman because they don’t actually produce most of what they sell.
How Does Effective Cost Leadership Cut Out the Middleman?
Businesses looking to develop and implement a cost leadership strategy typically do so by looking at their current value and supply chains from a number of angles. In an effort to diagnose areas that could potentially be cut to reduce costs they review their supply chains in their entirety. When developing a cost leadership strategy, it’s important to have a wholistic view of the current and potential states of the supply chain. Cutting costs in one area of the supply chain could potentially raise them in others, so no one part should be cut without first viewing its relationship and impact on other sectors.
Sometimes, businesses find ways to cut entire sections of the chain from the equation. When this happens, it’s usually the case that they’ve managed to cut the middleman. It’s worth noting here that for most companies, the supply chain is a very large and complex structure with more than one middleman involved. Though we may think of the middleman as a single entity, in reality, there can be a middleman at several different levels of the organization and along different routes on the supply chain. For example, a company may decide to do its own product shipping, eliminating the need to outsource to outside drivers.
It may even decide to manufacture, ship, and sell its own products, going directly to the consumer with their goods. This may prove to be an effective way to cut costs, but making cuts in one portion of the supply chain may raise costs in others. A company may find, for instance, that not outsourcing the shipment of their products actually incurs more costs—which will then be passed onto consumers. Let’s take a look at some examples of effective cost leadership strategies that cut the middleman.
The Fast Food Industry
Fast food has done a great job of eliminating the need for middlemen—albeit on a small scale. With the introduction of new technology, it appears that major fast food restaurants are upping their cost leadership game.
One of the major ways that fast food helped deal with the middleman problem was by inventing the drive-thru. The drive-thru effectively eliminated the need for waiters and servers, helping businesses cut costs while still managing to serve customers. It may seem that this simply switched one middleman for another since the order still has to be delivered. It is worth noting that the number of people required to get the job done was significantly reduced.
This has become even more true with the introduction of smart technology. Customers can now order their meals through smartphone apps or in-store kiosks. Therefore, fast food restaurants are eliminating the need for a massive human workforce. This has proven an effective cost leadership strategy because of the convenience to the customer.
Retail has seen a similar trend of eliminating middlemen on a small scale. The customers need for a cashier is bypassed by implementing an automated self-checkout system. Ashrays takes this further with a store that seamlessly integrates with a customer’s online account, eliminating the need for cashiers. As technology continues to advance, it’s possible that it will become an increasingly important component to cost leadership strategies.
The Bottom Line
Cost leadership strategies can be an effective way for a business to cut costs and see a profit increase. Developing an appropriate cost leadership strategy requires a full understanding of the value and supply chains of a certain business.
One of the most effective ways to reduce costs is to reduce unnecessary middlemen.
By removing third-party middlemen from the equation, businesses can streamline the delivery of their product to consumers.
Done correctly, a cost leadership strategy will save companies money while still appealing to their targeted customer base.