 “Porter’s five forces model is an analysis tool that uses five forces to determine the profitability of an industry and shape a firm’s competitive strategy”[1]  “It is a framework that classifies and analyzes the most important forces affecting the intensity of competition in an industry and its profitability level.”  A firm pursuing a cost-leadership strategy attempts to gain a competitive advantage primarily by reducing its economic costs below its competitors.  If cost-leadership strategies can be implemented by numerous firms in an industry, or if no firms face a cost disadvantage in imitating a cost-leadership strategy, then being a cost leader does not generate a sustained competitive advantage for a firm. The ability of a valuable cost-leadership competitive strategy to generate a sustained competitive advantage depends on that strategy being rare and costly to imitate.

1. COST LEADERSHIP
STRATEGY

2. DEFINITION :
 A firm pursuing a cost-leadership strategy attempts to gain a
competitive advantage primarily by reducing its economic
costs below its competitors.
 If cost-leadership strategies can be implemented by
numerous firms in an industry, or if no firms face a cost
disadvantage in imitating a cost-leadership strategy, then
being a cost leader does not generate a sustained
competitive advantage for a firm. The ability of a valuable
cost-leadership competitive strategy to generate a sustained
competitive advantage depends on that strategy
being rare and costly to imitate.

3. RISKS
 Cost advantage is ephemeral. It does not remain for so long
as competitors can imitate the cost reduction techniques
easily.
 Cost leadership is obviously not a market friendly approach.
Often, severe cost reduction can dilute customer focus and
limit experimentation with product qualities. This may create
situation where cost reduction is done for own sake and the
interests of the customers are ignored.
 Technological shifts are a great threat to the cost leader as
these may change the ground rules on which an industry
operates

4. BENEFITS
 Cost advantage is probably the best insurance against
industry competition. An organization is protected against the
ill effects of competition if it has a lower cost structure for its
products and services
 The threat of cheaper substitutes can be offset to some
extent by lowering prices
 Cost advantage acts as an effective entry barrier for
potential entrants, who cannot offer the products/services at
a lower price.

5.  Powerful suppliers possess higher bargaining power to
negotiate price increases for inputs. Organizations that
possess a cost advantage are less affected in such a
scenario as they can absorb the price increases to some
extent.
 Powerful buyers possess higher bargaining power to
effect a price reduction. Organizations that possess a
cost advantage can offer price reduction to some extent.

6. EXAMPLES
 Wal-Mart
 Wal-Mart Stores Inc. has been successful using its
strategy of everyday low prices to attract
customers. The idea of everyday low prices is to
offer products at a cheaper rate than competitors
on a consistent basis, rather than relying on sales.
Wal-Mart is able to achieve this due to its large
scale and efficient supply chain. They source
products from cheap domestic suppliers and from
low-wage foreign markets. This allows the company
to sell their items at low prices and to profit off thin
margins at a high volume.

7.  McDonald's
 The restaurant industry is known for yielding low
margins that can make it difficult to compete with a
cost leadership marketing strategy. McDonald's has
been extremely successful with this strategy by
offering basic fast-food meals at low prices. They
are able to keep prices low through a division of
labor that allows it to hire and train inexperienced
employees rather than trained cooks. It also relies
on few managers who typically earn higher wages.
These staff savings allow the company to offer its
foods for bargain prices.