Cost Leadership Strategy

Cost Leadership StrategyAn integrated set of actions designed to produce or deliver goods or services at the lowest cost, relative to competitors with features that are acceptable to customers.

relatively standardized productsfeatures acceptable to many customerslowest competitive price For example, Apple

Company has been able to draw policies and strategies that are aimed at ensuring that the company is the lowest cost producer and distributor.Cost efficiency has given them success and made sustainable company.They have standard products with several useful features.1Cost Leadership StrategyAiming to become Lowest Cost ProducerThe firm can compete on the price with every other industries and earn higher unit profits.Cost reduction provides the focus of the organizations strategy.Targets a broad marketCompetitive advantage is achieved by driving down costs.A successful cost leadership strategy requires that the firm is the cost leader and is unchallenged in this position.Especially beneficial : where customers are price sensitiveFor example, Wal-mart

It is famous for everyday low price(EDLP).It is developed by developing close relationships with its suppliers and vendors to achieve cost savings through large volume purchases.These savings are passed to the consumers. Wal-mart has adopted cost leadership strategy over the decades. Which will helpful them for their business.2Cost Leadership Strategy3 ways to achieve this:Economies of scalelow direct and indirect operating costscontrol over the supply chain

Operating cost : These are the expenses associated with day to day business.Operating costs include both fixed cost and variable cost.

A supply chain is the network of all the individuals, organizations, resources, activities and technology involved in the creation and sale of a product.3Cost Leadership StrategyCost saving actions required by this strategy:building efficient scale facilitiestightly controlling production costs and overheadminimizing costs of sales, R&D and servicebuilding efficient manufacturing facilitiesmonitoring costs of activities provided by outsiderssimplifying production processesFor example, Reliance Industries

Reliance Industries has become a global leader in various business activities based on innovation and cost.It has achieved more efficient production arising from experience and economies of scale, innovation in production methods.They have good manufacturing units and there is a less wastage from their production processes which will reduce their cost.

4How to Obtain a Cost AdvantageCost DriversValue ChainDetermine and controlReconfigure, if neededChange in automationNew distribution channelDirect sales in place of indirect salesNew advertising mediaBackward integrationExample, Dell

Forward integration

Cost Drivers are the main factors which would be determined and controlled. So that cost for the products can be reduced.Value chain : how can you add value to your products so sales of your product will increase.For Backward Integration , Dell : Dell has achieved market share by keeping low inventories and only building computers to order.So there is no procurement cost for raw material and products.5Cost DriversProduct featuresPerformance Mix & variety of productsService levelsSmall vs. large buyersProcess technologyWage levelsProduct featuresHiring, training, motivationEconomies of scaleAsset utilizationCapacity utilization patternSeasonal, cyclicalInterrelationshipsOrder processing and distributionValue chain linkagesMarketing & salesLogistics & operationsServiceType : Public

Industry : Beverage

Founded : 1886

Founder(s) : Asa Griggs Candler

Headquarters : Coca-Cola headquarters, Atlanta, Georgia, U.S.

Area served : Worldwide

Employees : Approx. 1.3 millions(Dec, 2013)

Flavor : Cola, Cola Cherry, Cola Vanilla, Cola Green Tea, Cola Lemon, Cola Lemon Lime, Cola Lime, Cola Orange and Cola Raspberry.

7

BrandsCoca colaFocusing on cost leadership through disciplined working capital management and tight operating expenses control.

Optimization of the production and distribution infrastructure

Personal cost ownership throughout the organization

Logistic excellence

Daily Average serving to 1.8 million people

Logistic refers to the distribution process within the company.9Coca colaEnsure the strongest and most efficient production, distribution, and marketing systems possible

The established Coca-Cola, Business Services Organization (BSO) that standardizes, centralizes, coordinates and simplifies certain Finance and Human Resources processes to improve productivity and provide important transactional services at a lower cost

Success Mantra Access to the capital required to make a significant investment in production assets.

Design skills for efficient manufacturing

High level of expertise in manufacturing process engineering

Efficient distribution channels

Cost Leadership Strategy and the Five Forces of CompetitionRivalry Among Competing FirmsCan use cost leadership strategy to advantage since:competitors avoid price wars with cost leaders, creating higher profits for the entire industryRivalry Among Competing FirmsBargaining Power of BuyersBargaining Power of SuppliersThreat of New EntrantsThreat ofSubstitute ProductsFive Forces ofCompetition12Cost Leadership Strategy and the Five Forces of CompetitionBargaining Power of BuyersCan mitigate buyers power by:driving prices far below competitors, causing them to exit and shifting power with buyers back to the firmRivalry Among Competing FirmsBargaining Power of BuyersBargaining Power of SuppliersThreat of New EntrantsThreat ofSubstitute ProductsFive Forces ofCompetition13Cost Leadership Strategy and the Five Forces of CompetitionBargaining Power of SuppliersCan mitigate suppliers power by:being able to absorb cost increases due to low cost positionbeing able to make very large purchases, reducing chance of supplier using powerRivalry Among Competing FirmsBargaining Power of BuyersBargaining Power of SuppliersThreat of New EntrantsThreat ofSubstitute ProductsFive Forces ofCompetition14Absorbed costs include such expenses as insuranceCost Leadership Strategy and the Five Forces of CompetitionRivalry Among Competing FirmsBargaining Power of BuyersBargaining Power of SuppliersThreat of New EntrantsThreat ofSubstitute ProductsFive Forces ofCompetitionThreat of New EntrantsCan frighten off new entrants due to:their need to enter on a large scale in order to be cost competitivethe time it takes to move down the learning curve15Cost Leadership Strategy and the Five Forces of CompetitionThreat of Substitute ProductsCost leader is well positioned to:make investments to be first to create substitutesbuy patents developed by potential substituteslower prices in order to maintain value positionRivalry Among Competing FirmsBargaining Power of BuyersBargaining Power of SuppliersThreat of New EntrantsThreat ofSubstitute ProductsFive Forces ofCompetition16Pitfalls of Overall Cost Leadership StrategiesToo much focus on one or a few value-chain activities.All rivals share a common input or raw material.The strategy is initiated too easily.A lack of parity on differentiationErosion of cost advantages when the pricing information available to customers increases.

Risks of Cost Leadership StrategyThere can only be one cost leader.

Technological change can eliminate cost advantage.

Processes used by the cost leader to produce and distribute its good or service could become obsolete because of competitors innovations.

Competitors may learn how to successfully imitate the cost leaders strategy.

Risks of Cost Leadership StrategyIt could lead to a damaging price wars.

There might be difficulty in sustaining cost leadership in the long run.

A firm following a focus strategy might be able to achieve even lower cost within their segment.

Lower customer loyalty