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8/7/2019 Low Cost Leadership
1/22
KSOM
Session Outline
Competitive Positioning at the Business Level
Value Creation Frontier
Value Map
Porters Generic Strategies
The Strategic Logic of Cost Leadership
Steps in Strategic Cost Analysis
@Ashok K. Sar 1SFM2010: Low Cost Leadership
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Competitive Positioning
at the Business Level
@Ashok K. Sar SFM2010: Low Cost Leadership 2
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Competitive Positioning
and the Value Creation Frontier
@Ashok K. Sar SFM2010: Low Cost Leadership 3
Value Creation Frontierrepresents the maximum
value the products of
different companies insidean industry can give
customers at any one timeby using differentbusiness models.
Companies on the valuecreation frontier have themost successful strategyin a particular industry.
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Generic Business Models
and the Value Creation Frontier
@Ashok K. Sar SFM2010: Low Cost Leadership 4
Four PrincipalGeneric Strategies
1. Cost Leadership
2. Focused
Cost Leadership
3. Differentiation
4. Focused
Differentiation
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Value Map
@Ashok K. Sar SFM2010: Low Cost Leadership 5
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The Five Generic
Competitive Strategies
@Ashok K. Sar SFM2010: Low Cost Leadership 6
Mar
ketTarget
Type of Advantage Sought
Overall Low-Cost
LeadershipStrategy
Broad
DifferentiationStrategy
Focused
Low-Cost
Strategy
Focused
Differentiation
Strategy
Best-Cost
Provider
Strategy
Lower Cost Differentiation
Broad Range
of Buyers
Narrow
Buyer
Segment
or Niche
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The Strategic Logic of Cost Leadership
@Ashok K. Sar SFM2010: Low Cost Leadership 7
Price, unit costP, C,
q, quality
PE
PF
qEqF
CE
CF
DC
E
F
Dq
indifference
curve
Consumer Surplus Parity
PE PF < CE - CF
PF CF > PE - CE
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KSOM
Conditions Suitable for
Seeking a Cost Advantage
When the nature of the product does not allow
benefit enhancement
When consumers relatively price sensitive and
When the product is a search good rather than an
experience good
@Ashok K. Sar SFM2010: Low Cost Leadership 8
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The Strategic Logic of Cost Leadership
Price its product below the rivals and sell more or
Match rivals price and achieve better price-cost
margins
Offering the same benefits as the competitors do
(differentiation parity)
Offering a slightly lower benefit (differentiation
proximity) or
Offering a qualitatively different product.
@Ashok K. Sar SFM2010: Low Cost Leadership 9
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Steps in Strategic Cost Analysis
1. Identify value chain and assign costs & assets to it
2. Diagnose the cost drivers of each value activity &how they interact with each other
3. Identify linkages
4. Identify competitors value chains, and determinethe relative cost of competitors & the source ofcost difference
5. Develop a strategy to lower cost position thru
controlling cost drivers or reconfiguring value chain6. Protect differentiation parity/ proximity
7. Test the cost reduction strategy for sustainability
@Ashok K. Sar SFM2010: Low Cost Leadership 10
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Stage 1. Identify The Principal Activities
The Case Of Automobile Manufacture
@Ashok K. Sar SFM2010: Low Cost Leadership 11
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@Ashok K. Sar SFM2010: Low Cost Leadership 12
Inboundlogistics3%
Firm Infrastructure 9%
Technology development 9%
40%
1%
Margin
27%
Human resource management 2%
Service1%
Marke
ting&
sales
6%
Outboundlogistics1%
Purchased operating input Human resource costs
Procurement 1%
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@Ashok K. Sar SFM2010: Low Cost Leadership 13
8%15%6%
Firm Infrastructure 16%
Human resource management 1%
Technology development 2%Procurement 1%
38%
2% 5% Marketing&sales1
%
Service2%
InboundLogistics
8%
Operations 46% OutboundLogistics
20%Fixed assets
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Diagnose the cost drivers of each value activity &
how they interact with each other
@Ashok K. Sar SFM2010: Low Cost Leadership 14
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Identify linkages
@Ashok K. Sar SFM2010: Low Cost Leadership 15
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en y compe ors va ue c a ns, andetermine the relative cost of competitors
& the source of cost difference
@Ashok K. Sar SFM2010: Low Cost Leadership 16
Technology
development
Process innovations
lowering production costs
Product redesign to reduce
number of components
Global, online
suppliers
provide
automatic
restocking of
orders based
on sales
Inbound logistics Operations Outbound logistics Marketing & sales
Economy of
scale in plant
reduces
equipment
costs and
depreciation
Computerized
routing lowers
transportation
expense
Cooperative
advertisingwith
distributorscreates local
cost advantagein buying
media spaceand time
Subcontractedservicetechniciansrepairproduct
correctlyfirst timeor bearcosts
Reduced levels of management
cuts corporate overhead
Computerized, integrated information
system reduces errors and costs
Safety training for all employees reduces absenteeism,
downtime, and accidents
Humanresource
management
Generaladministration
Favorable long-term contracts; captive suppliers or key customer
for supplier Procurement
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Develop a strategy to lower cost positionthru controlling cost drivers
@Ashok K. Sar SFM2010: Low Cost Leadership 17
PRODUCTION TECHNIQUES
PRODUCT DESIGN
INPUT COSTS
CAPACITY UTILIZATION
RESIDUAL EFFICIENCY
ECONOMIES OF LEARNING
ECONOMIES OF SCALE
Organizational slack; Motivation &
culture; Managerial efficiency
Ratio of fixed to variable costs
Speed of capacity adjustment
Location advantages
Ownership of low-cost inputs
Non-union labor
Bargaining power
Standardizing designs & components
Design for manufacture
Process innovation
Reengineering business processes
Increased dexterity
Improved organizational routines
Indivisibilities Specialization and division of labor
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Develop a strategy to lower cost position
thru reconfiguring value chain
A different production process
Difference in automation
Direct sales instead of indirect sales
A new distribution channels A new raw material
Major differences in forward or backward verticalintegration
Shifting the location of facilities relative to suppliersand customers
New advertising media
@Ashok K. Sar SFM2010: Low Cost Leadership 18
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Develop a strategy to lower cost position
thru reconfiguring value chain
Reasons for cost advantage
Presents the opportunity to fundamentally
reconfigure a firms cost, compared to settling for
incremental improvements. Eg. No-frills airlines (50% less cost)versus Trunk Airlines
Altering the basis of competition in a way that favors a
firms strength.
Eg. Carbo-thermic Reduction process versus. Aluminaroute by Japanese firms to produce metal from Bauxite
@Ashok K. Sar SFM2010: Low Cost Leadership 19
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Develop a strategy to lower cost position
thru reconfiguring value chain
To identify new value chain
How can the activity be performed differently or
even eliminated?
How can a group of linked activities be recorded orregrouped
How might coalitions with other firms lower or
eliminate costs
@Ashok K. Sar SFM2010: Low Cost Leadership 20
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Protect differentiation parity/ proximity
@Ashok K. Sar SFM2010: Low Cost Leadership 21
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Test the cost reduction strategy for
sustainability
Better positioned than RIVAL COMPETITORS tocompete offensively on basis of price
Low-cost provides some protection from bargainingleverage of powerful BUYERS
Low-cost provides some protection from bargainingleverage of powerful SUPPLIERS
Low-cost providers pricing power acts as a
significant barrier for POTENTIAL ENTRANTS Low cost puts a company in position to use low price
as a defense against SUBSTITUTES
@Ashok K. Sar SFM2010: Low Cost Leadership 22
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