Cost reduction is one of the most important factors to enhance corporate profits, as well as to achieve and to maintain competitive advantages against other industry participants.
Cost leadership enables the realisation of profits even in highly competitive markets. Cost leadership is often achieved by Economies of scale or economies of scope.
Economies of scale refer to the synergies that arise when large quantities of a product are produced. The bigger a company gets, the cheaper it is able to produce and/or distribute each additional unit.
Econonomies of scope arise when a company manufactures several and complementary products. These effects and the search for diversification were the main reasons for the merging to conglomerates in the 80’s.