It would be interesting to start this discussion by briefly defining cost leadership and then describing its techniques and their importance. According to Atrill and McLaney (2012, pp. 347) competitive advantage through cost leadership is accomplished when a company can successfully compete on price. The authors further clarify that competitiveness in the long term is strongly linked to price competitiveness and cost management. In fact, the authors establish a cause and consequence relationship between strategic cost management and competitive pricing. The application of quality management and production processes optimization which also includes the utilization of resources more efficiently than its competitors, a company can achieve competitive advantage through cost leadership.
Some of the techniques that a company can use in order to manage costs are total life cycle costing; target costing; Kaizen costing; economies of scale and buying in bulks. According to Atrill and McLaney (2012, pp. 346) total life cycle costing comprehends to every cost incurred not only during the production stage but also in all earlier and after production stages. A product continues to accumulate costs when being distributed and going through the after sales services. When it comes to target costing one can describe it as being a market based way of managing costs. The authors further explain that in order to reach the target cost it is of fundamental importance to take into account every aspect of cost reduction.
The Kaizen costing is all about optimizing products design and production processes. The authors highlight that in order to accomplish the desired cost reduction, it is essential that the employees are involved. The participation of all members of the production teams might also contribute to a more dynamic work environment, promoting knowledge sharing and motivation through learning. When talking about small business, one can also cite economy of scale as a way of cost management. The more products a company produces the lower will be the price of each unit. Last but not least, buying in bulk can also have a tremendous impact on costs. Since the more the enterprise buys the more the supplies will be willing to offer lower prices for the raw material.
The incorporation of the life cycle approach into cost management is relevant since it takes into consideration all the phases of cost accumulation. It is also extremely useful when initial costs and operating costs have to be compared in order to choose the one that increases net savings to its best results.
Atrill, P. & McLaney, E. (2012) Management Accounting for Decision Makers. 7th ed. Harlow, England : Pearson Education Ltd.