Cost minimization or cost leadership is one of Michael Porter's three generic strategies for achieving competitive advantage. Large businesses may use a temporary cost leadership strategy, and even operate at a loss, in order to drive out other businesses in the industry. A long-term cost minimization strategy requires a business to maintain profitability. This means that a business will aim to operate at a lower cost than its competitors.
Cost minimization includes strategies to increase asset turnover (which allows fixed costs to be spread over more units of production) and strategies to reduce direct costs (for example, by limiting differentiation and customization of projects and capitalizing on economies of scale). To reduce costs, companies may also outsource non-core activities, such as payroll, call handling, and transaction processing; aggressively control of overheads (such as banning first class travel on airlines); and use their bargaining power to negotiate better pricing with suppliers. These are cost-reduction strategies used by cost leaders such as Wal-Mart.
Benefits to cost minimization include lower unit costs, higher profit margin, higher operating profits, improved cash flow, and higher return on equity. However, cost minimization can leave companies with insufficient capacity to handle unexpected increases in demand. Cost reductions by one department may also surprise other departments if they are not properly communicated.
Butler, J. E. & Jones, G. R. (1998). Costs, revenue and business-level strategy. Academy of Management Review, 13 (2), 202-213.
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