COST LEADERSHIP
COST LEADERSHIP
The
firms operating in this highly competitive environment are always on the move
to become successful. To strive in this competitive environment the firms
should have an edge over the competitors. To develop competitive advantage, the
firms should produce good quality products at minimum costs etc. This means
that the firms should provide high quality at low cost so that the customer
gets the best value for the product he/she is buying. Therefore, it becomes
necessary for the firms to have a strategic edge towards its competitors. One
such competitive strategy is overall cost leadership, which aims at producing
and delivering the product or service at a low cost relative to its competitors
at the same time maintaining the quality. According to Porter, following are
the prerequisites of cost leadership (Cherunilam, 2004):
1)
Aggressive construction of efficient scale facilities;
2)
Vigorous pursuit of cost reduction from experience;
3)
Tight cost and overhead control;
4)
Avoidance of marginal customer accounts;
5)
Cost minimization.
According
to Porter cost leadership is perhaps the clearest of the three generic or business
level strategies (Bolten & McManus, 1999). To sustain the cost leadership throughout,
the firm must be clear about its accomplishment through different elements of
the value chain. Figure-1 shows a matrix of the three generic
competitive strategies and their interrelationship given by Porter.
Figure-1 : Three Generic Competitive Strategy
This
strategy involves the firm winning market share by appealing to cost-conscious
or price-sensitive customers. This is achieved by having the lowest prices in
the target market segment, or at least the lowest price to value ratio (price
compared to what customers receive). To succeed at offering the lowest price
while still achieving profitability and a high return on investment, the firm
must be able to operate at a lower cost than its rivals. There are three main
ways to achieve this.
The
first approach is achieving a high asset turnover. In service industries, this
may mean for example a restaurant that turns tables around very quickly, or an
airline that turns around flights very fast. In manufacturing, it will involve
production of high volumes of output. These approaches mean fixed costs are
spread over a larger number of units of the product or service, resulting in a
lower unit cost, i.e. the firm hopes to take advantage of economies of scale
and experience curve. For industrial firms, mass production becomes both a
strategy and an end in itself. Higher levels of output both require and result
in high market share, and create an entry barrier to potential competitors, who
may be unable to achieve the scale necessary to match the firms low costs and
prices.
The
second dimension is achieving low direct and indirect operating costs. This is
achieved by offering high volumes of standardized products, offering basic
no-frills products and limiting customization and personalization of service.
Production costs are kept low by using fewer components, using standard
components, and limiting the number of models produced to ensure larger
production runs. Overheads are kept low by paying low wages, locating premises
in low rent areas, establishing a cost-conscious culture, etc. Maintaining this
strategy requires a continuous search for cost reductions in all aspects of the
business. This will include outsourcing, controlling production costs,
increasing asset capacity utilization, and minimizing other costs including
distribution, R&D and advertising. The associated distribution strategy is to
obtain the most extensive distribution possible. Promotional strategy often
involves trying to make a virtue out of low cost product features.
The
third dimension is control over the supply/procurement chain to ensure low
costs. This could be achieved by bulk buying to enjoy quantity discounts,
squeezing suppliers on price, instituting competitive bidding for contracts,
working with vendors to keep inventories low using methods such as Just-in-Time
purchasing or Vendor-Managed Inventory. Wal-Mart is famous for squeezing its
suppliers to ensure low prices for its goods. Dell Computer initially achieved
market share by keeping inventories low and only building computers to order.
Other procurement advantages could come from preferential access to raw materials,
or backward integration.
Some
writers assume that cost leadership strategies are only viable for large firms
with the opportunity to enjoy economies of scale and large production volumes.
However, this takes a limited industrial view of strategy. Small businesses can
also be cost leaders if they enjoy any advantages conducive to low costs. For
example, a local restaurant in a low rent location can attract price-sensitive
customers if it offers a limited menu, rapid table turnover and employs staff
on minimum wage. Innovation of products or processes may also enable a startup
or small company to offer a cheaper product or service where incumbents' costs
and prices have become too high. An example is the success of low-cost budget
airlines who despite having fewer planes than the major airlines, were able to
achieve market share growth by offering cheap, no-frills services at prices
much cheaper than those of the larger incumbents.
A
cost leadership strategy may have the disadvantage of lower customer loyalty,
as price-sensitive customers will switch once a lower-priced substitute is
available. A reputation as a cost leader may also result in a reputation for
low quality, which may make it difficult for a firm to rebrand itself or its
products if it chooses to shift to a differentiation strategy in future.
4 comments:
Teamedoppex Thaliabebooro ugg australia uk
http://www.scottpublib.org
It was a awe-inspiring post and it has a significant meaning and thanks for sharing the information.Would love to read your next post too……
I got thіs sitе frоm my buddy whо told me regaгding this
site and at the momеnt this time I am visiting thіs ωeb ρage and
readіng very іnformatіve aгtіcleѕ
at thіѕ plаce.
my webpage: jailbreak iphone 3
Hi to every body, it's my first pay a quick visit of this weblog; this weblog consists of amazing and genuinely good data in favor of readers.
Feel free to surf to my web-site: Nike Free Run
Post a Comment