Mastering the Cost Leadership Strategy

After reading Chapter 6 on cost leadership strategy it’s safe to say this is a strategy that Amazon excels at pretty perfectly.  The text defines it as “one that focuses on gaining advantages by reducing its economic costs below all of its competitors.”  Does that sound familiar?  Amazon has not only gained advantages by reducing its costs, it’s changed the way in which business is done and the associated consumer expectations.

What’s interesting about applying the cost leadership strategy to Amazon’s business is that while they do not technically “produce” the goods that they sell, they have mastered several of the areas described within the cost leadership strategy.  The first, and possibly the most powerful, source of Amazon’s cost leadership is their economy of scale.  Amazon has consistently marketed themselves as the largest online marketplace in the world where you can find whatever you are looking for at any price.  Do you need a toilet brush scrubber for $5.99?  They have it.  Would you like an 18 karat gold watch for $73,000?  They also have that.  Because Amazon is able to have such a widespread reach of products and consumers, they are able to hold this as a cost advantage over smaller business attempting to achieve the same practice.  Similar to this, because Amazon’s economy of scale is so large they are able to disperse the overhead costs over more units sold.  Amazon already saves massive costs on their incredibly limited physical retail locations, but what overhead costs they do incur are spread over the millions of units that are sold online to consumers daily.

Another area within the cost leadership strategy that Amazon has mastered is the area of rare sources associated with cost advantage.  While having an economy of scale that is difficult to replicate, it is not seen as that rare and can sometimes be achieved in a low-cost manner.  However, Amazon has been able to achieve advantages within sources that are usually more difficult and costly to duplicate like their technological software.  Amazon is seen as one of the most technologically advanced companies due to their software resources that help purchase your order in quite literally the click of a button or that recommend similar, and possibly better, products based on their sophisticated CRM data.  To not only have this level of software in place but also to excel at it so masterfully has helped Amazon hold this as an incredibly rare source of cost advantage in addition to one of their many sustainable competitive advantages.  

Just by laying out a few of these examples, it’s very simple to see that Amazon not only utilize the cost leadership strategy but is one of the masters at this strategy.  By leveraging an incredible economy of scale in addition to sources like their sophisticated technological software, Amazon is able to anticipate your needs and fulfill them in a better, quicker and more efficient way than their competition.