Generic Strategy 1 - Cost-leadership strategy

From Chapter 8

What is cost leadership strategy?

becoming the systematically lowest-cost organisation in a domain of activity

What are the 4 key cost drivers that can help deliver cost-leadership

input costs, eocnomies of scale, experience, product/process design

2 examples of input costs

labour, raw materials

how can companies seekk low input costs and therefore competative advantage

locating labour-intenstive operations in countries with low labour costs e.g. call centres in India. Locating near to raw material sources

what are economies of scale

how increasing scale usually reduces the average cost of operation over a particular time - important where there’s high fixed costs

what are fixed costs

costs necessary for a level of output

How to economies of scale develop

by spreading fixed costs over a high level of output

a second advantage of economies of scale and example

can reduce input costs e.g. large airlines negotiate steep discounts from aircraft manufacturers

Whats important for the cost-leader

reach the output level equivalent to the the minium efficient scale

what is the minimum efficient sale

the smallest amount a company can produce while achieving the lowest possible average cost

Whats a disadvantage of economies of scale and example

can create diseconomies of scale - average cost per unit increase beyond a certain point (U-shaped graph) e.g. large volumes of output that require specialist overtime payments to workers or involve the neglect of equipment maintanence can become expensive.

what is the experience curve

implies that the cumulative experience gained by an organisation with each unit of output leads to a reduction in unit costs

two benefits of experience

gains in labour productivity as staff learn to do things more cheaply over time (learning curve effect), costs saved through more efficient designs or equipment as experience shows what works best

3 implications of the experience curve for business strategy

entry timing into the market - early entrants to market have greater experience so have a cost advantage

gain and hold market share - higher market share means more cumulative experience because of greater volumes

improvements greatest as start but continue over time

difference between economies of scale and experience curves

diseconomies of scale can appear after a certain point but for experience a worst case scenario is that the line showing cost reduction flattens out. However, new technology from competitors may produce steeper experience effects further improving cost savings

How does product/ process deign influence cost

efficiency can be designed from the outset e.g. build products from cheap standard components rather than specialised equipment, interact with customers through cheap online methods rather than stores or tailor their offerings to the most important customers saving money by ignoring others