In order to achieve cost leadership reduction should be continuous to maintain the cost differential with competitors and should involve an understanding of all stages of the value chain for a product or service of a firm. It can be gained by means of such methods as proprietary access to cheaper inputs or technologies, or by positioning to exploit any experience effects.
Costs are spread over the entire value chain in activities that contribute to the making of the product.
The main objective of gaining cost leadership is to assure that the cumulative cost across the value chain is lower as compared to its competitors. For this purpose it is necessary to analyze the cost drivers and identify the areas for optimization of costs.
For achieving cost leadership a series of steps are taken.:
1. Accurate demand forecasting and high capacity utilization is essential to realize cost advantages.
2. Economies of scale must operate to lower per unit cost of product/service.
3. High level of standardization of products and offering uniform service packages using mass production techniques yields lower per unit cost.
4. Aiming at the average customer makes it possible to offer a generalized set of utilities in a product/service to cover a greater number of customers.
5. Investments in cost-saving technologies can help a firm to save out of the cost, making the product/service competitive in the market.
6. Withholding differentiation till it becomes absolutely necessary is another way to realize cost-base competitiveness.
Usually cost leadership comes with market share, so the control of a large share of the market is likely to be necessary. Where there are limited opportunities to build an efficient plant, the second, third or other low-cost producers may also be able to achieve above average performance.
Since the cost leader relies on the economies of scale and the like, cost leadership is likely to be more sustainable in the long run if relatively stable, no frills products of reasonable quality are involved. For the same reason, cost leadership strategies are more appropriate in relatively stable environments.
The human resource requirements of a cost leader are also distinct. Unskilled personnel can undertake much of the workload, and technocrats such as scientists and engineers are not required on any large scale, particularly where commodity products are involved. Similarly, cost control is of the utmost importance, and very developed formal systems are often encountered.
The strategy of cost leadership to operate requires the existence of certain necessary conditions in the market. The price- based competition prevails in the product/service market that makes reduction of costs an important factor. The product is highly standardized so the differentiation is superfluous. Existence of numerous buyers possessing a significant bargaining power to lower down the price of the product. There is low level of customer loyalty and low cost of switching to another seller. There are not many ways available to differentiation to take place.
In sum, cost-leadership strategies work best when the customers are price-sensitive and base their purchase decisions primarily on cost rather than features of product or service.
Costs are spread over the entire value chain in activities that contribute to the making of the product.
The main objective of gaining cost leadership is to assure that the cumulative cost across the value chain is lower as compared to its competitors. For this purpose it is necessary to analyze the cost drivers and identify the areas for optimization of costs.
For achieving cost leadership a series of steps are taken.:
1. Accurate demand forecasting and high capacity utilization is essential to realize cost advantages.
2. Economies of scale must operate to lower per unit cost of product/service.
3. High level of standardization of products and offering uniform service packages using mass production techniques yields lower per unit cost.
4. Aiming at the average customer makes it possible to offer a generalized set of utilities in a product/service to cover a greater number of customers.
5. Investments in cost-saving technologies can help a firm to save out of the cost, making the product/service competitive in the market.
6. Withholding differentiation till it becomes absolutely necessary is another way to realize cost-base competitiveness.
Usually cost leadership comes with market share, so the control of a large share of the market is likely to be necessary. Where there are limited opportunities to build an efficient plant, the second, third or other low-cost producers may also be able to achieve above average performance.
Since the cost leader relies on the economies of scale and the like, cost leadership is likely to be more sustainable in the long run if relatively stable, no frills products of reasonable quality are involved. For the same reason, cost leadership strategies are more appropriate in relatively stable environments.
The human resource requirements of a cost leader are also distinct. Unskilled personnel can undertake much of the workload, and technocrats such as scientists and engineers are not required on any large scale, particularly where commodity products are involved. Similarly, cost control is of the utmost importance, and very developed formal systems are often encountered.
The strategy of cost leadership to operate requires the existence of certain necessary conditions in the market. The price- based competition prevails in the product/service market that makes reduction of costs an important factor. The product is highly standardized so the differentiation is superfluous. Existence of numerous buyers possessing a significant bargaining power to lower down the price of the product. There is low level of customer loyalty and low cost of switching to another seller. There are not many ways available to differentiation to take place.
In sum, cost-leadership strategies work best when the customers are price-sensitive and base their purchase decisions primarily on cost rather than features of product or service.
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