Cost leadership is a firm that enjoys a lower unit cost for a good than all competitors in a market. Pursuit of cost leadership is a common type of business strategy. The following are illustrative examples.

Efficiency

Efficiency is the amount of output you get for a unit of input. This is the foundation of cost leadership. For example, a taxi service that consumes $0.14 of energy per mile is more efficient that one that consumes $1.00 per mile assuming the level of vehicle is comparable. The following factors impact efficiency.

Automation	Capital
Equipment	Know-How
Machines	Productivity
Scale	Tools

Productivity

Productivity is the efficiency of labor. For example, a farmer with a combine harvester will generally produce more in an hour of work than a farmer harvesting the same crop by hand.

Production Scale

Production costs tend to drop as you product more of a product or service. For example, a hotel with 10 rooms may spend $1 per room per night on laundry work whereas a hotel with 1000 rooms may be able to reduce this cost to $0.50 with larger, more efficient equipment and specialized labor.

Purchasing Power

The ability to get larger discounts as you purchase more of something. For example, a large ecommerce company that purchases 30,000 pairs of shoes a month from a brand may get a larger discount than a small shop that purchases 30 pairs from the brand.

Input Costs

Lower input costs such as a country or location that has inexpensive labor, electricity and land.

Anti-Competitive Practices

In some cases, costs are lowered with anti-competitive practices such as a government that gives subsidies to a business. For example, a government that subsidizes one manufacturer's electricity costs such that they have an unfair advantage over their competition in an energy intensive industry.

Price Competition

Cost leadership allows a firm to compete aggressively on price and remain competitive. This assumes that quality including elements such as brand image are equal. For example, a large retailer with a $4 cost for a popular brand of shampoo can almost certainly offer a lower price than a small retailer with a $5.50 cost for the same product.

Substitutes

The impact of cost leadership can be reduced by price competition from substitute goods. For example, the firm with the cheapest bananas may face reduced sales if apple farmers reduce their costs and prices as some consumers will purchase the cheapest fruits available.

Overview: Cost Leadership
Type	Product Development
Definition	A firm that enjoys a lower unit cost for a good than all competitors in a market.
Related Concepts	Product Development » Unit Cost » Goods » Business Strategy » Efficiency » Productivity »