Cost Leadership
"It is wise to keep in mind that
neither success nor failure is
ever final." -- Roger Babson
(Entrepreneur, investor & founder
of Babson College)
“Onto the next one” -- Jay-Z
(Musician, actor & entrepreneur)
4-1
1
Chapter 4
Cost Leadership
4-2
Cost Leadership
The Strategic Management Process
External
Analysis
Mission
Strategic
Choice
Objectives
Strategy
Implementation
Competitive
Advantage
Internal
Analysis
Business Level
Strategy
Corporate Level
Strategy
The actions that firms
take to gain competitive
advantage in a single
market or industry
4-3
3
Cost Leadership
There are 2 generic types of business level
strategy…
Cost Leadership: focuses on gaining advantages by
reducing firm costs below competitors
Product Differentiation
4-4
4
Cost Leadership
Why Cost Leadership Matters
Competitive Market
ATCind
ATCff
P
Above Normal
Economic
Returns
D
Q
4-5
5
Cost Leadership
Understanding Cost Advantage
Managers need to understand who has
the cost advantage in their market
4-6
6
Cost Leadership
Sources of Cost Advantage
Economies of Scale
4-7
7
Cost Leadership
Sources of Cost Advantage
Competitor Diseconomies of Scale
4-8
8
Cost Leadership
Sources of Cost Advantage
Learning Curve Economies
4-9
9
Cost Leadership
Sources of Cost Advantage
Differential Low-Cost Access to Productive Inputs
4-10
10
Cost Leadership
Sources of Cost Advantage
Technology Independent of Scale
4-11
11
Cost Leadership
Sources of Cost Advantage
Policy Choices
4-12
12
Cost Leadership
Cost Leadership & Competitive Advantage
A source of cost advantage will lead to sustainable
competitive advantage if that source is:
• Valuable
• Rare
• Costly to Imitate
• Organized (Implemented Appropriately)
4-13
13
Cost Leadership
Value of a Cost Advantage: Env. Threats
Buyers
New Comp.
Existing Comp.
• competitors rationally
avoid price competition
Substitutes
Suppliers
4-14
14
Cost Leadership
Value of a Cost Advantage: 6 Segs. of GEE
Specific
International
Events
European Union Ban on
Hormone-Treated U.S. Beef
Technological
Change
Technology
Diffusion to
Emerging
Markets
Demographic
Trends
Suburbanization of population
Focal
Firm
Changing Policy toward Oil
Exploration on Public Lands
Legal/Political
Conditions
Poor Image of Big Business
‘Crappy’
Economy
Cultural
Trends
Economic
Climate
4-15
15
Cost Leadership
Rareness of a Cost Advantage
The rareness of a source of cost advantage
depends heavily on the industry life cycle:
Generally…
Emerging
Mature
Not Rare
Rare
Diseconomies of Scale
Rare
Rare
Learning Curve Economies
Rare
Not Rare
Differential Input Access
Rare
Rare
Technology
Rare
Not Rare
Policy Choices
Rare
Rare
Economies of Scale
4-16
16
Cost Leadership
Imitability of Sources of Cost Advantage
Different conditions determine if a source of cost
advantage will be costly to imitate
Low Cost Conditions
Unbalanced Industry Capacity and Demand
Non-Proprietary Technology
Highly Observable Technology
Transactional Exchange
4-17
17
Cost Leadership
Imitability of Sources of Cost Advantage
High Cost Conditions
Balanced Industry Capacity and Demand
Path Dependence (Historical Uniqueness)
Protected Technology (Patents, Trade Secrets)
Highly Unobservable Technology (Causal Ambiguity)
Relational Exchange (Social Complexity)
4-18
18
Cost Leadership
Implementing a Cost Leadership Strategy
A strategy is only as good as its implementation
Strategy is implemented through organizational
structure and control
• structure: 1) the division of management
responsibilities, and 2) the establishment of
reporting relationships
• control: policies intended to influence behavior—align
the interests of the individual with the interests of the
organization
4-19
19
Cost Leadership
The ‘functional structure’ (aka u-form) is used to implement
cost leadership... it allows for task specialization… CEO
facilitates cost saving practices across functions… functional
managers closely supervise employees
Chief Executive Officer
Finance
Accounting
Production
Human
Resources
Marketing
R&D
4-20
20
Cost Leadership
Organizational Controls
Policies intended to influence behavior by aligning
the interests of the individual with the interests of
the organization
Management Controls
Formal
• budgeting policies
Informal
• culture
• credit policies
• attitudes
• spending policies
• leadership styles
• travel policies
• purchasing policies
4-21
21
Cost Leadership
Organizational Controls cont.
Example of Cost Related Management
Controls Taken Too Far
Despair Incorporated
4-22
22
Cost Leadership
Organizational Controls cont.
Compensation Policies
• non-monetary awards
• vacations
• compensation based on:
• parking places
• cost reduction
• office decor
• stock options
• financial performance
Compensation policies should reinforce
management controls focus on low cost and efficiency
4-23
23
Cost Leadership
Summary
Business Level Strategy
Cost Leadership
Cost Advantages
Economies of Scale
Diseconomies of Scale
Learning Curve Economies
Differential Input Access
Competitive Advantage
Depends on Meeting
VRIO Criteria
Technology
Policy Choices
4-24
24