Cost leadership

What are the three key areas in strategic choices?

• External analysis

• Internal analysis

• Strategic choice formulation.

What is the purpose of external analysis?

To identify opportunities and threats in the market environment.

What is the goal of internal analysis?

To understand the company’s resources, capabilities, and strengths.

What is the purpose of making strategic choices?

To select the best strategy that fits both external and internal conditions. (To know how to compete)

What is business-level strategy?

It is the strategy a company uses to compete in a single market or industry.

Why is business-level strategy important?

Because it determines how a company creates value and gains a competitive advantage.

What are the five types of business-level strategies?

• Cost leadership

• Differentiation

• Focus

• Integrated strategy

• Hyper-differentiation.

What is cost leadership strategy? How does cost leadership create competitive advantage?

Competing by having the lowest cost structure in the industry. It allows a company to offer lower prices or achieve higher margins than competitors.

What is a differentiation strategy? How does differentiation help companies?

Offering unique products or services that customers perceive as more valuable. It builds brand loyalty and reduces price sensitivity.

What is focus strategy? Why would a company use a focus strategy?

Targeting a specific market niche with tailored products or services.To serve a small segment more effectively than broad-market competitors.

What is an integrated strategy?

A combination of cost leadership and differentiation.

When is an integrated strategy effective?

When the company can manage both low cost and product uniqueness simultaneously.

What is hyper-differentiation?

Creating extreme uniqueness, often found in luxury markets or highly specialized industries.

What is the key difference between business and corporate-level strategy?

Business-level strategy focuses on how to compete, while corporate-level strategy focuses on where to compete.

What questions does business-level strategy answer?

Who are our customers? What value do we offer? Do we compete through cost or uniqueness?

What are examples of business-level strategy?

McDonald’s (cost leadership) Tesla’s EV division (differentiation)

What questions does corporate-level strategy answer?

What businesses should we enter? How do we create value across units? Should we diversify, acquire, or divest?

What are examples of corporate-level strategy?

Nestlé managing food, drinks, and health brands Alphabet managing Google, YouTube, Waymo

Does cost leadership mean selling at the lowest price?

No, it means having the lowest cost structure, not necessarily the lowest selling price.

What kind of products are associated with cost leadership?

Standardized, reliable, efficient, and affordable.

What are the six main sources of cost advantage?

1. Size

2. Experience

3. Cheaper inputs

4. Technology

5. Distribution

6. Operations

How does size contribute to cost advantage?

Through economies of scale – producing more at lower unit costs.

How does experience reduce cost?

Through learning curve effects – firms become more efficient over time.

How can technology provide cost advantages?

By automating tasks, reducing waste, and improving process speed.

What are structural cost drivers?

Long-term strategic decisions like factory location, tech, and product range.

What are executional cost drivers?

Day-to-day decisions like training, layout, and supplier efficiency.

Why are both structural and executional cost drivers important?

Both must be optimized to maintain sustainable low costs.

Q27: What are the 5 steps to analyze and gain cost advantage?

1. Identify value activities

2. Measure cost of each

3. Find cost drivers

4. Analyze linkages

5. Identify cost-saving opportunities

What is the goal of Value Chain Analysis?

To find where to cut costs or increase value.

What are the two outcomes of a VCA?

Cost advantage
Product differentiation

What are the five steps to conduct VCA?

1. Map activities
2. Measure cost/time
3. Find inefficiencies
4. Eliminate non-value steps
5. Benchmark competitors

How does cost leadership protect against competition?

New entrants: hard to undercut
Rivals: win price wars
Substitutes: your product is the best deal
Suppliers: absorb cost hikes
Buyers: maintain margins under pressure

What makes cost leadership sustainable?

It must be rare
It must be hard to imitate (tech, scale, location)

What can erode cost advantage over time?

Globalization
Technological change
Offshoring
Competitive catch-up