Cost leadership is a concept developed by Michael Porter

Michael Porter

Michael Eugene Porter is the Bishop William Lawrence University Professor at Harvard Business School. He is a leading authority on company strategy and the competitiveness of nations and regions. Michael Porter’s work is recognized in many governments, corporations and academic circles globally...

, used in business strategy. It describes a way to establish the competitive advantage. Cost leadership, in basic words, means the lowest cost of operation

Cost of operation

The cost of operation is the business strategy implemented in many companies to gain a huge market. Cost of operation is the cost acquired in completing one operation. It may be a conversion of inputs into the outputs or labor costs etc. If the cost of operation is low then it is easy to maintain...

 in the industry. The cost leadership is often driven by company efficiency, size, scale, scope and cumulative experience (learning curve

Learning curve

A learning curve is a graphical representation of the changing rate of learning for a given activity or tool. Typically, the increase in retention of information is sharpest after the initial attempts, and then gradually evens out, meaning that less and less new information is retained after each...

).
A cost leadership strategy aims to exploit scale of production, well defined scope and other economies (e.g. a good purchasing

Purchasing

Purchasing refers to a business or organization attempting for acquiring goods or services to accomplish the goals of the enterprise. Though there are several organizations that attempt to set standards in the purchasing process, processes can vary greatly between organizations...

 approach), producing highly standardized products, using high technology.
In the last years more and more companies choose a strategic mix to achieve market leadership

Dominance (economics)

Market dominance is a measure of the strength of a brand, product, service, or firm, relative to competitive offerings. There is often a geographic element to the competitive landscape...

. This patterns consist in simultaneous cost leadership, superior customer service

Customer service

Customer service is the provision of service to customers before, during and after a purchase.According to Turban et al. , “Customer service is a series of activities designed to enhance the level of customer satisfaction – that is, the feeling that a product or service has met the customer...

 and product leadership

Product leadership

Product Leadership is a concept which describes delivering state-of-the-art products in the market. Product leadership can be achieved by innovation, design, development, time-to-market delivery and brand-marketing of products ....

.

Cost leadership is different from price leadership. A company could be the lowest cost producer, yet not offer the lowest-priced products or services. If so, that company would have a higher than average profitability

Profit (accounting)

In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...

. However, cost leader companies do compete on price

Price

-Definition:In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.In modern economies, prices are generally expressed in units of some form of currency...

and are very effective at such a form of competition, having a low cost structure and management.