In the book Competitive Advantage, there are several chapters on using value chain analysis[1]. Michael Porter argues that there are only two types of competitive advantage:
As its name might imply, cost leadership allows a competitive edge by manipulating production costs. It does this in two important ways:
How companies go about implementing the Cost Leadership strategy[2] often depends on the specifics of their given industry[3]. Many business ventures will have access to capital for investing in technology and infrastructure. These kinds of adjustments and innovations help businesses bring down costs. It also helps to minimize the standard operating expenses. As an extension of that, proper logistics are crucial. Companies must be able to effectively manage the flow of products between the point of creation and respective storefronts. One real-world business who has championed Cost Leadership is Wal-Mart. The conglomerate has built its model partly on low prices, continually promising to beat those of its competitors. Executives are able to do that because Wal-Mart has an especially efficient supply chain, often sourcing products from less expensive foreign markets. To gain cost advantage a firm has to go through 5 analysis steps:
Personally, I am not a huge fan of the cost leadership because there is always someone in the market who can come along with a product or service that is a little bit cheaper. For a cost leadership strategy to work, you require a significant cost differential that competitors recognize. Else, you are caught in a commodity trap selling an undifferentiated product at lower and lower prices. APAMLAHarvardVancouverChicagoIEEE Think Insights (October 29, 2022) Cost Advantage. Retrieved from https://thinkinsights.net/strategy/cost-advantage/. "Cost Advantage." Think Insights - October 29, 2022, https://thinkinsights.net/strategy/cost-advantage/ Think Insights May 8, 2018 Cost Advantage., viewed October 29, 2022,<https://thinkinsights.net/strategy/cost-advantage/> Think Insights - Cost Advantage. [Internet]. [Accessed October 29, 2022]. Available from: https://thinkinsights.net/strategy/cost-advantage/ "Cost Advantage." Think Insights - Accessed October 29, 2022. https://thinkinsights.net/strategy/cost-advantage/ "Cost Advantage." Think Insights [Online]. Available: https://thinkinsights.net/strategy/cost-advantage/. [Accessed: October 29, 2022] Yes No
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A company has two options for translating a low-cost advantage over rivals into attractive profit performance:Is to use the lower-cost edge to underprice competitors and attract price-sensitive buyers ingreat enough numbers to increase total profits.Is to maintain the present price, be content with the present market share, and use the lower-cost edge to earn a higher profit margin on each unit sold, thereby raising the firm’s total profits and overall return on investment.A low-cost advantage over rivals can translate into better profitability than rivals attain.While many companies are inclined to exploit a low-cost advantage by using option 1 (attacking rivals with lower prices), this strategy can backfire if rivals respond with retaliatory price cuts (in order to protect their customer base and defend against a loss of sales). A rush to cut prices can often trigger a price war that lowers the profits of all price discounters. Thebigger the risk that rivals will respond with matching price cuts, the more appealing it becomes to employ the second option for using a low-cost advantage to achieve higher profitability.The Two Major Avenues for Achieving a Cost AdvantageTo achieve a low-cost edge over rivals, a firm’s cumulative costs across its overall value chain must be lower than competitors’ cumulative costs. There are two major avenues for accomplishing this: Perform value chain activities more cost-effectively than rivals.Revamp the firm’s overall value chain to eliminate or bypass some cost-producing activities.Cost-Efficient Management of Value Chain Activities No activity can escape cost-saving scrutiny, and all company personnel must beexpected to use their talents and ingenuity to come up with innovative andeffective ways to keep down costs. Particular attention must be paid to a set offactors known as cost driversthat have a strong effect on a company’s costsand can be used as levers to lower costs2CORE CONCEPTA cost driver is a factor that has a strong influence on a company’s costs. LU 5 – Chapter 5 Topic 1-5Capturing all available economies of scale.Economies of scale stem from an ability to lowerunit costs by increasing the scale of operation. Economies of scale may be available at different points along the value chain. Taking full advantage of experience and learning-curve effects.The cost of performing an activity can decline over time as the learning and experience of company personnel build. Operating facilities at full capacity.Whether a company is able to operate at or near full capacity has a big impact on unit costs when its value chain contains activities associated with substantial fixed costs. Improving supply chain efficiency.Partnering with suppliers to streamline the ordering and purchasing process, to reduce inventory carrying costs via just-in-time inventory practices, to economize on shipping and materials handling, and toferret out other cost-saving opportunities is a much-used approach to cost reduction. Upload your study docs or become a Course Hero member to access this document Upload your study docs or become a Course Hero member to access this document End of preview. Want to read all 16 pages? Upload your study docs or become a Course Hero member to access this document |