Low Cost Leadership

8/7/2019 Low Cost Leadership

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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


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


Four PrincipalGeneric Strategies

1. Cost Leadership

2. Focused

Cost Leadership

3. Differentiation

4. Focused

Differentiation


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Value Map



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The Five Generic

Competitive Strategies


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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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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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



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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.



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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



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Stage 1. Identify The Principal Activities

The Case Of Automobile Manufacture



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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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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



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Identify linkages



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en y compe ors va ue c a ns, andetermine the relative cost of competitors

& the source of cost difference


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


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



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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



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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



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Protect differentiation parity/ proximity



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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


Documents

Low Cost Leadership