Cost Leadership Strategy (Low-Cost Strategy) - iEduNote

Cost Leadership Strategy (Low-Cost Strategy) · doing a better job than competitors in performing internal value chain activities efficiently, · Taking initiatives ... Costleadershipstrategyisalsoknownas‘low-costproviderstrategy’,orsimply‘low-coststrategy.’Wewillusethetermlow-coststrategy’inthisbook.Thecompanythatfollowsthisstrategyintendstobecometheoveralllow-costproviderintheindustryinwhichthecompanyoperatesitsbusiness.Acompanystrategyofsellingitsproductsatapricelowerthanitscompetitorsisknownasacostleadershipstrategy.Theemphasisisplacedontheproductionofstandardizedproductsatalowper-unitcostforprice-sensitivecustomers.Charginglowerpricebecomespossiblewhenthecompanycanensurepost-reductionbyoperatingbusinessinahighlycost-effectivemanner.Thestrategictargetofthisstrategysabroadsectionofthe,marketwherethecompanyofferseconomicalpricesThecompanyemphasizescostreductionwithoutreducingquality.Thecompanyintensetogainmarketsharebyunderpricingthecompetitors.Somewidelyknowncompaniesthatemploylow-coststrategyincludeWhirlpoolandgeneralelectroniccompanyinhomeappliances,BlackandDeckerinpowertools,andmore.Thekeytosustaininglow-coststrategiestomanagecostsdownineveryareaofthecompany’sbusiness.Thegoalofthisstudyistooutperformcompetitorsthroughlow-costleadership.Whenacompanybecomesalow-costleaderitislikelytoearnabove-averageprofits.CreatingandthensustainingcostadvantagesRKtoattainingsuccessinalow-coststrategy.Accompanymeacheapcostadvantagebydoingabetterjobthancompetitorsinperforminginternalvaluechainactivitiesefficiently,Takinginitiativestocutdownthecostofvaluechainactivities,andrecognizingthevaluechaintoavoidorbypasssomecostproducingactivities.Costleadershipimpliesthattheorganizationhasalowercoststructurethanacompetitorandthereforeitisinapositiontoofferthecostadvantagetocustomersbyofferinglowerprices.Thesourcesofthecostadvantagecanberareandinimitable.Theorganizationdesignsthecostadvantage.Walmart,AirAsia,McDonald’sTimex,andCalvinCarearesomeexamplesoforganizationscompetingbasedoncostslowerthancompetitors.Organization’sCostLeadershipStrategyorLow-CostStructureareDesignedtoLeverageOrganization’scostleadershipstrategyorlow-coststructureleverages;size,learningadvantagesdifferential,accesstoresourcesreconfigurationofthevaluechain,technology-relatedcostadvantages.SizeSizeimpliesthevolumeofproduction.Asthevolumeofproductionincreasesperunitcostofproductionisloweredtillanoptimumvolumeisreached.Ahighervolumeofproductionimpliescostreductionsacrosssomeofthekeyfunctions.Thereductioninthecostofproductionisseeninoperationssuchasproduction,marketing,andservicing.Further,ahighervolumeofproductionenablesanorganizationtouseequipmentandmachineswhoseuseisnotpossibleinsmallerproductionvolumes.Forexample,inareadymadegarmentworkshop,therearemanytypesofmachinesforfinishingthatonecannotaffordtobuyanduseinaboutiquestitchingshop.Thesemachinesreducethecycletime,furtherloweringcosts.Overheadcostsarealsoapportionedoveralargervolume.LearningAdvantagesAsthevolumeofproductionincreasessodoestheexperienceoftheemployeesdoingthetaskrepeatedly.Anincreaseinexperiencemeansfewermistakes.Organizationsthatmayhavethehighestaccumulatedvolumeoftheproductionarelikelytohavethelowestcostbasedonthelearningcurve.Withtheincreaseinthecumulativevolumeofproduction,greaterefficiencyisobtainedasproductionmethodsarefine-tunedandimproved.DifferentialAccesstoResourcesOrganizationsmayhavebetteraccesstoresourcesthantheircompetitors.Itcouldbeaccesstoanaturalresource,locationadvantageorbetterworkforcebyproximitytoaneducationalhub.ConsiderafictionalexampleofanorganizationsourcingitsoilsupplyfromSaudiArabiaversusanotherfromtheNorthSea.TheonesourcingfromSaudiArabiahasadistinctivecostadvantageovertheonesourcingfromtheNorthSeawherethecostofdrillingandtransportationismuchhigher.Thecostofgainingadifferentialadvantagemustbelowerthanthecostsavingsfromusingthatadvantage.ReconfigurationoftheValueChainOrganizationscaneitheralterthevaluechainincrementallyorreconfigureitafreshbyrestatingtheircompetitivepostureandstrategy.Attimesanorganizationiscaughtincosttrapsservingnoparticularsegmentfully.Letusconsiderthecaseofafictionalairlinethatservesneitherthefull-faresegmenttotallynorthelow-costsegment.Itofferssomethingforeverybodyanditsprofitabilityislowerthanthatofrivalswhoeitherservethefullsegmentortheno-frillssegment.Toimproveitsprofitabilityitreconfiguresroutes,hasmoreflyinghoursperday,operatesearlymorninginandlatenightoutflightstobusinessdestinationssothatflyerscandoadaytrip,chargesforfood,seatsbasedonfirst-come,first-servedandfocusesonbeingpunctual.Thisreconfigurationofthevaluechaincreatescostadvantagesthatweren’trealizedearlier.If,however,theorganizationisnotcaughtupinthecosttrapastheairlinewas,incrementalchangesarepossible.TechnologyRelatedCostAdvantagesTechnologyrelatedcostadvantagesmaybeindependentofscaleeconomies.Anorganizationmayhavetheabilitytousecomputers,robots,informationtechnologyinamoreefficientmannerthanitscompetitors.Itmayusethesametechnologyasisavailabletootherstocreateforitselfsomedistinctionsuchasamorecomprehensivedatabase.SharingInformationandKnowledgeTheorganization’scultureofsharinginformationandknowledgeisanimportantaspectofcreatingacostadvantage.Organizationsthatcompeteonthecostbasisintegratethecostreductionthinkingacrossallfunctionsandactivitiesnotonlyinthekeyareas.Costadvantagedoesnotresultfromafewactivities;itistheoutcomeofthecumulativeactivitiesanorganizationperformstobeinacost-competitiveposition.Thereisanasymmetryinthecostadvantagesyieldedbysomefunctionalareasoverothersbutoverallcostadvantageisnotachievedbyafocusonafewareas.Cost-consciousnessisbuiltacrosstheentireorganization.Costsdeemedunnecessaryarecurtailedacrosstheorganization.Thefunctionalstrategieshavetobearticulatedtodeliverinconsonancewiththecostfocusstrategy.BenefitsofCostLeadershipStrategytoBusinessOrganizationsAbusinessorganizationmayderivethefollowingbenefitsfrompursuingacostleadershipstrategy:OvercomingthreatsfromcompetitorsBecauseofitscostadvantage,acompanycanprotectitselffromthebusiness-attacksofthecompetitors.Ifcompetitorsenterintoamarketwithalowprice,thecompanycanevenfurthercutdownitsprices.Thisispossiblebecausethecompanyhasalreadydevelopedwaystoreducecostsandsustainthecostadvantage.Itscost-leadershippositionhelpsitdominatethecompetitors.EffectivedealingwithpowerfulsuppliersWhensuppliersarefewinnumberaswellaspowerful,theymaytrytoincreasepricesofrawmaterials/otherinputs.Thecompanywithalow-coststrategycanenduresuchprice-increasebecauseofitsoveralllowercosts:FacingpowerfulbuyerseffectivelyPowerfulbigbuyers(suchasdealersandwholesalersorretailchainslikeAgora,MeenaBazaarofWal-Mart)maydictatethepricesofacompany’sproducts.Acompanythatfollowsacostleadershipstrategyislessaffectedbysuchactionsofbuyers.EncounteringthreatsfromsubstituteproductsAlow-costleadercanovercomethreatsfromsubstituteproducts.Itcanreducethepriceofitsproductsifsubstituteproductsstartenteringthemarket.Low-costleadershiphelpsthecompanyretainitsmarketshare.OvercomingthreatsfromtheentryofpotentialcompetitorsAcompanywithalow-coststrategyorcostleadershipstrategycandiscourageotherpotentialinvestorstocometothemarket.Itscostadvantageautomaticallycreatesbarrierstoentry.Other,companiesmayfinditdifficulttomatchtheircostswiththatof.thelow-costleader.CostleadershipandSupplyChain.Thecostleadershipstrategyisrealizedbydevelopingahighlyefficientcost-responsivesupplychain.Lowinventorylevelsaremaintained,theinventoryturnoverishigh,theplantleadtimeisless,thebuyersarelow­costandmatchtheirvaluechainwiththecustomer,theyenabletime-definitedeliverieswithlowvariabilityandordersaregenerallystandardized.Manufacturingavoidswaste,error,andtheuseofunnecessaryassets.Tasksthatcanbedoneatacostadvantagearesourcedoutside.Maintenanceforsmoothfunctioningisdoneroutinelyasthecostofabreakdownmaybehigh.Employeesaretrainedtocarryoutstandardizedtasksandfollowcost-efficientmethods.Thesuppliersaresmallerorganizationsforwhomtheorganizationmaybeamajororadominantbuyer.CostLeadershipandResearchandDevelopmentResearchanddevelopmentinacost-focusedenvironmentaimtoreducethecosts.Technologysourcingandadaptationarethepreferredroutesoveraproductorprocess-specificresearch.Theresearchanddevelopmenteffortsaremoreinclinedtowardstheadaptationofthebestpracticesleadingtocostandefficiencyadvantagesthanfreshresearch.Acost-focusedstrategyimpliesthattheresearchanddevelopmentfocusismoreonslowerproductreleasesandlesserinvestmentintheR&D.CostleadershipandManufacturing/OperationsThemanufacturingortheoperationsstrategyhasasignificantimplicationoncosts.Themanufacturingsystemthatisadaptedtothecostfocuswillbeconfiguredtofititsowellthatitmayimmediatelybepossibletoconfigureitforanyotherfocus.Operationsstrategyisbasedontheextentoftheproductandprocesscomplexity.Thelowproductcomplexityismoreconducivetomassproductionaswouldberequiredtoattainthedesiredcostposition.Theproductionprocessmaybecomplextohandlethelargevolumeofstandardizedproducts.Alow-coststrategyisnotsynonymouswithlowqualityandthereforetheproductionprocessmaybecomplex,asonalargevolumebasemanydifferentspecificationshavetobehandled.Productioniscontinuousandgenerallywithahighdegreeofautomation.Maximumcapacityutilizationisthetargettoattaineconomiesofscale.CostleadershipandtheMarketingStrategyCostleadershipisbasedonthepremisethatthemarketispricesensitive.Marketingisaggressiveandpromotionsanddiscountsarewidelyused.Thedistributionchannelshavetobeefficientandmaybeconfiguredtothevaluechainofthemanufacturer.Thefocusison‘pushtheproduct’.CostLeadershipandHumanResourcesStrategyIdeally,thehumanresourcestrategyisaimedatrecruitingandretainingthebesthumanresourceswithinanorganization.Thepursuitofaspecificstrategydeterminestheskillprofileofthepeoplewhoarerequiredwithintheorganizationandthedevelopmentofperformancemeasurescommensuratewiththestrategy.Thecostleadershipstrategyrequiresahighdegreeofcoordinationamongthekeyareas.Tobeabletoreapthebenefitsofscaleadvantagetimingisanothercrucialdeterminant.Employeeswhoexhibitahighdegreeoffocusenergy,capacitytodeliversoonerandfocusonmeasurableresultswillbegreaterassetsforsuchastrategy.CostLeadershipandFinanceStrategyCorporatestrategyhasagreaterbearingonthefinancefunctionthanthefunctionalstrategy.Thefinanceandaccountingstrategyatthebusinesslevelisconcernedwithapportioningcosttokeyactivities,creatingmeasuresoffinancialcontrol,managingthecashflowsandshorttermfundrequirementsoftheorganization.Inthecompetitivedomain,theresponsibilitiesofthefinancefunctionremainthesame.Thechoiceofthecompetitivestrategydeterminesthetypeandextentoffinancialcontrolmeasurestobeused.Thecostfocusstrategyuseskeyfinancialratiostomeasureperformanceandascontrols.Acquisitionstoenhancecapacitymaybemadeonamorerigidappraisalofcapacityandefficiencybenefits.CostLeadershipandDigitizationDigitizationisanimportantsourceofcreatingefficiencyandeffectivenessintheorganization.Forcostcontrolthesynergybetweenthedigitizationandtheinformationsystemoftheorganizationisimportant.Theinformationsystemenablesittohaveaconnectedsuppliernetworkandworktowardszeroinventorygoals.Forcostadvantage,thesupplychainsystemsarelinkedwithanautomatedmanufacturingsystemtoreduceinventoryandremoveduplicationofeffort.Theorganizationusesenterprise-widesystemstofacilitatestandardization.However,inthefuture,thismighthavetobelinkedwithroboticsforfullyautomatedmanufacturing.MarketSituationsFavorableforCostLeadershipStrategyAlow-costproviderstrategyworksbestunderthefollowingsituations:Whenthebranddifferencesfromcompanytocompanyareminor,andatthesametime,theproductsarestandardizedandreadilyavailableWhenthemarketiscomposedofalargenumberofprice-sensitivebuyerswhowanttobuyproducts,atthelowestpossibleprice.Whentherearefewwaystoachieveproductdifferentiation.Itmeansthatitisdifficulttodifferentiatethecompany’sproductsfromthoseofcompetitorsduetothenatureoftheproduct.Buyersbecomesensitivetopricedifferenceswhenproduce-to-productdifferencesarenegligible.Insuchasituation,theywillgoforthelowestprice.Whenswitchingcostsfromthecompany’sbrandtocompetitors’brandsareloworevenIfbuyerspurchaseanotherbrandandthisswitchingfromthepreviousbranddoesnotinvolveanyadditionalcost(suchastransportationorrepair)theyarelikelytooptforthelower-pricedbrand.Whentherearealargenumberofbuyerswithsignificantbargainingpower,i.e.,they,havesignificantpowertonegotiateprice-relatedtermsandconditions.Whenprice-competitionamong,thesellers/suppliersisverytough.Acostleadershipstrategyhelpsproducers,tocompeteeffectivelybasedontheprice.Whenthecompanyisinapositiontousethelower-costedgetoattractprice-sensitivebuyersingreatenoughnumberstoinfluencetotalprofits.ReasonsforFailureofCostLeadershipStrategyThecostleadershipstrategyorlow-coststrategyhassomeshortcomingsorpitfalls.Managersneedtotakecareofthesepitfallssothattheycap,undertakeappropriatemeasurestobesuccessfulwiththisstrategy.Theshortcomingsareasfollows,whichareresponsibleforthefailureof thecostleadershipstrategy:Itmayinviteaggressiveprice-cuttingbycompetitors.Itmayleadtoaprice-warthatmayleadtolowerprofitability.Costadvantagesmaynotsustainifcompetitorscaneasilyimitatethestrategy.Whenthecompetitorscancopythecostadvantages,acostleadershipstrategywillfail.So,thewaystoachievecostadvantageneedtobedifficultforotherstocopy.Ifalow-costproductdoesnotcontainenoughattributestobeattractivetoprospectivebuyers,thestrategymayfail.Lowpriceisnotalwaysappealingtobuyers.Attractivenessmaybelostiftheproductisfeatures-poororquality-deficient.Thecostleadershipstrategymaybecomeineffectivewhentherearetechnologicalbreakthroughsbythecompetitorsintheindustry.StrategicChoiceofLow-CostProviderTobesuccessfulwiththecostleadershipstrategy,low-costprovidersresorttovariousstrategicchoices:Theytrytoavoidproductdifferentiation.Ifavoidingdifferentiationisdifficultduetochangesinthemarket,theywillfullychoosealowlevelofproductdifferentiationtokeepproductioncostsatalowlevel.TheywaitandseewhencustomersseriouslyWanttohavedifferentiatedfeaturesintheproduct.Theydonotfocusonelitecustomersinthemarket.Averagecustomersaretheirmaintargets.Theydonotoperateindifferentmarketsegmentswithdifferenttypesofproducts.Thisisbecauseitishighlyexpensivetodevelopproductlinesfordifferentmarketsegments.Theirattentionismoreonreducingcostsineachareaofbusinessactivities.Theywanttoincreaseefficiencyinproductionandserviceactivitiestoreducewastageofresources.Theydevelopdistinctivecompetenciesinmanufacturingandmaterialsmanagementtoreducemanufacturingcostsandtherebyincreasingefficiency.Theydevelopskillsinflexiblemanufacturing/leanmanufacturing,just-in-time(JIT)productionandtotalqualitymanagement.Theyalsoadoptefficientmaterialsmanagementtechniques.Theyemphasizeonstrictproductioncontrolandrigorouslyusebudgetstocontroltheproductionprocess.←DifferentiationStrategy:Definition,Types→CorporateStrategy:ImplementationProcessofCorporateStrategyReadRelatedPosts/4LevelsofStrategy:TypesofStrategicAlternativesIndustryLifeCycleCompetitiveStrategy:FourTypesofCompetitiveStrategyCorporateStrategy:ImplementationProcessofCorporateStrategyCostLeadershipStrategy(Low-CostStrategy)DifferentiationStrategy:Definition,TypesFocusStrategy:Meaning,TypesofFocusStrategyBestCostStrategy:Definition,ExamplesFragmentedIndustry:StrategiesForFragmentedIndustryStrategicOptionsforDifferentIndustriesandCompanySituationsADVERT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