Cost Leadership Notes

Chapter 4: Cost Leadership

Overview of Strategic Management Process

• Key Elements
  • Mission
  • Objectives
  • External Analysis
  • Internal Analysis
  • Strategic Choice
  • Strategy Implementation
  • Competitive Advantage
  • Diagram illustrating the Strategic Management Process

Business-Level Strategy

• Focus on external and internal analyses; next step is strategic choice.
• Two main areas of strategic choice:
  • Business-Level Strategy
  • Cost leadership
  • Differentiation
  • Focus strategy
  • Corporate Strategy
  • E.g., level of diversification

Definition of Business-Level Strategy

• Business-Level Strategy:
  • Actions taken to gain competitive advantage in a single market or industry.
• Corporate-Level Strategy:
  • Actions to gain competitive advantage across multiple markets or industries.
• Example: Disney illustrates the distinction between business and corporate strategies.

Types of Business-Level Strategy

• Two main types:
  • Cost Leadership Strategy (Chapter 4)
  • Focused on minimizing costs to gain competitive advantage.
  • Differentiation Strategy (Chapter 5)
• Focus Strategy:
  • E.g., Ben and Jerry’s targets specific market segments.

Cost Leadership Strategy

• Definition:
  • A strategy where a firm aims to gain a competitive advantage by reducing costs below competitors.
• Examples of Cost Leaders:
  • Ryanair
  • Walmart
  • Spirit Airlines (Ultra Low Cost)

Important Sources of Cost Advantage

1. Size Differences and Economies of Scale:
   • Increased production reduces average cost.
   • Diseconomies of scale can occur past certain production thresholds.
2. Experience Differences and Learning-Curve Economies:
   • Cumulative production leads to lower average costs due to experience.
   • No known diseconomies of learning, but efficiency gain diminishes over time.
3. Differential Low-Cost Access to Productive Inputs:
   • Better access to lower cost resources (e.g. labor, land, materials).
   • Examples include cheaper labor markets and natural resources advantages.
4. Technological Advantages:
   • Can vary from proprietary technology to scalable equipment.
5. Policy Choices:
   • Strategic decisions can reduce costs, e.g., product standardization and cultural policies focused on cost reduction.
   • Establishing a cost-conscious culture is critical.

Cost Leadership and Sustained Competitive Advantage

• Easier to Imitate:
  • Scale economies because production can be adjusted readily.
• Hard/Cheap to Imitate:
  • Learning curves and unique policy choices that stem from historical context (e.g., Wal-Mart’s supply chain).
  • Socially complex resources such as culture and organizational routines supportive of cost reduction.

Organizing to Implement Cost Leadership

• Organizational Elements:
  • Structure, control systems, and compensation policies need to align with cost leadership.
• Organizational Structure:
  • Simplicity with few reporting layers, focus on cost efficiency in business functions.
  • Functional divisions should align with the cost leadership strategy:
  • R&D: Process improvements, product extensions.
  • Manufacturing: Lean and quality focus.
  • Marketing: Emphasize low cost and reliability.
  • Finance/Accounting: Support with a low-cost focus.
• Management Controls:
  • Utilize tight cost controls, quantitative goals, and close supervision.
• Compensation Policies:
  • Motivational systems for cost reduction and incentive for employee participation.