Business Organization and Policy

The cost leadership strategy is an incorporated set of actions taken by a firm designed to produce or else deliver goods and services respectively with characteristics that are satisfactory to customers at the lowest cost relative to that of its rivals (Hoskisson & Ireland, 2008, 135). In this paper, we shall discuss five of these strategies and how they work in favor of the firm which applies them.

Demand forecasting is the dedication for understanding consumer goods or services and this understanding is harnessed and used to forecast consumer demand (Kazmi, 2008, 126). This enables the firm to keep the right amount of stock at hand because if the demand is underrated, sales can be lost due to a shortage of supply of goods. If, on the other hand, the demand is overrated, then the firm is left with an excess stock and that could also be a drain to the firm financially. It is therefore imperative that a firm understands demand and is able to accurately predict the market outcome since understanding demand makes a firm more competitive in the market. In order for a firm to be better able to meet its customers’ needs, it has to set up appropriate forecasting models so that it can be prepared to meet the actual demands of its customers.

Economies of scale are the things which cause the standard cost of producing a product to reduce while the quantity of its production increases. There are two varieties of economies of scale: internal economies of scale which are the funds that accumulate to a firm in spite of the industry, market or atmosphere in which it functions; and external economies of scale which benefit a firm because of the way in which its industry is organized. An example of economies of scale is the ability of large firms to carry out sophisticated research because they are able to spread this expenditure across a greater volume of sales and this has led to many mergers in recent years.

The standardization of products is basically an attempt by a firm to reduce costs while increasing the quality of the product it produces by using more efficient methods of production. This is done by minimizing the differences in the product which a firm produces and by doing so, production is rapidly increased, in the process reducing the cost of raw materials.

Aiming at the average customer makes it possible to offer a generalized set of utilities in a product to cover a greater number of customers (Kozami, 2002, 229). This means that a firm will be able to spend less in producing the product but gain more because the average customers are a large market. The cost of production will be quickly recovered and in the process, a large profit will also be made.

Firms often invest in research and development leading to cost saving technologies and as a result, they often trade an increase in fixed costs for a reduction in variable costs (Harrison & St. John, 2009, 91). Examples of cost saving technologies include Internet Banking services provided by most banks, and the reservation systems maintained by major airlines. Investment in cost saving technologies allows for the lowering of overall costs and provides a degree of information and control that was previously impossible to achieve.