04.Cost.leadership

8/8/2019 04.Cost.leadership

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Lecture 04:

Cost Leadership

Niels-Erik Wergin

Strategic Management


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Strategic Management Niels Wergin 20092

Mission Objectives

External

Analysis

Internal

Analysis

Strategic

Choice

Strategy

Implementation

Competitive

Advantage

Business Level

Strategy

Corporate Level

Strategy

How to Position a

Business

in the Market?

Which Businesses

to Enter?

The Strategic Management Process


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Two Generic Business Level Strategies

Cost Leadership (this week):

generate economic value by having lower coststhan competitors

Product Differentiation (next week):

generate economic value by offering higher quality (or

more service) than competitors

Example: Asda

Example: Waitrose

Business-Level Strategies


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4

Managers need to understand who has

the cost advantage in their market

it could be the focal firm

it could be a competitor

develop a strategy to exploit the advantage

develop a strategy to either capture the

advantage or compete on some other basis

Understanding Cost Advantage


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5

Economies of Scale

average cost per unit falls as quantity increases

-until the minimum efficient scale is reached

are a cost advantage because competitors may

not be able to match the scale because of capital

requirements (barrier to entry)

international expansion may allow a firm to haveenough sales to justify investing in additional

capacity to capture economies of scale

Sources of Cost Advantage

Example: Computers, Cars, Clothes


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Learning Curve Economies

a firm gets more efficient at a process with experience

the more complicated/technical the process,

the greater the experience advantage

Example: Computers

international expansion may propel a firm down theexperience curve because of higher volumes



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Policy Choices

firms get to choose how they will serve the market

well offer level of quality that is inexpensive to

produce

firms can make policy choices that give people

incentives to reduce cost at every opportunity

Example: Ryanair, EasJet



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The Strategy Clock


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Route 1: No Frills Strategy

Low price combined with low perceived product

benefits focusing on price-sensitive market segments

Commodity markets

Price-sensitive customers

High power, low switching costs among buyers

Opportunity to avoid major competitors


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Route 2: Low-Price Strategy

Lower price than competitors while offering similar

product benefits

Pitfalls Margin reductions

Inability to reinvest


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Route 3: Hybrid Strategy

Seeks to simultaneously achieve differentiation and

low price relative to competitors

Advantageous when Greater volumes can be achieved

Cost reductions outside differentiated activities areavailable

Used as an entry strategy


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Route 4: Differentiation Strategy

Seeks to provide products that offer benefits that

differ from those offered by competitors

Dependent upon Identifying and understanding strategic customer

needs

Identifying key competitors strategies


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Route 5: Focused Differentiation

Seeks to provide high perceived product benefits, justifyingprice premiums

Key issues

Choice between focus strategy and broad differentiation Tensions between focus strategy and other strategies Market changes


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Routes 6-8: Failure Strategies

6 Increase prices without increasing

service/product benefits

7 Reduction in product/service benefits with

increase in relative price

8 Reduction in benefits whilst maintaining price


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Achieving Low Prices

Operate with lower

margins

Develop a unique

cost structure

Create efficiency in

organisational

capabilities

Focus on market

segments with

low expectations


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Summary

The bases of competitive strategy include no frills, low-price,

differentiation, hybrid, and focused differentiation strategies

Managers must consider the bases upon which price-based

or differentiation strategies can be sustained on strategiccapabilities

Sustainable competitive advantage is difficult to achieve in

hypercompetitive conditions

Strategies of collaboration may offer alternatives to orcomplement competitive strategies


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Key Debate: To be Different or the Same ?

To what extent do universities compete bybeing different or the same? Carmanufacturers?

Considering the nature of their industries andkey players within them, why might theseorganisations adopt these approaches to

conformity or differentiation?


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Case: Ryanairs No Frills Strategy

What are the elements of

Ryanairs no frills

strategy?

How easy would it be for

larger airlines such as BA

to imitate the strategy?

On what bases could

other low-price airlines

compete with Ryanair?

04.Cost.leadership

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