B2B Mktg - Session 05c - Cost Leadership Students' Copy)

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B2B MarketingSri Balaji Society 2010-12 (Sem I)

Session 05c

Cost Leadership

Girish Ketkar Session 05cB2B Marketing

Sri Balaji Society 2010-12 (Sem I)

Agenda

Cost leadership

– Aim

– Key factors

Steps in cost leadership strategy

Case studies

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Reading

Competitive Advantage (Michael E. Porter)

– Chapter 3: Cost Advantage



Cost Leadership

Aim

– To become the low-cost producer in its industry

Key factors

– Exploit all sources of cost advantage

– Ensure parity or proximity in the bases of differentiation

– Achieve and sustain overall cost leadership

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Cost Leadership



Cost Leadership Strategy

Steps

– Define the value chain

– Assign costs and assets to value activities

– Study cost drivers

– Understand cost dynamics

– Identify sources of cost differences vis-à-vis competitors

– Build strategy to control cost drivers

– Reconfigure the value chain

– Test for sustainability

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Defining the Value Chain

Disaggregate each generic category of value chain into value activities, depending on

– Size and growth of cost represented by the activity

– Cost behavior of the activity

– Competitor differences in performing the activity



Assignment of Costs and Assets

Assign costs to activities in which they are incurred

Assign assets to activities that employ, control or most influence their use

Accounting figures may need to be recast

Estimates are fine; Precision is not essential

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Cost Drivers

Factors that affect costs

– Economies (or diseconomies) of scale

– Learning and spillovers

– Pattern of capacity utilization

• Important when fixed costs are high

– Linkages

• Linkages within the value chain

• Vertical linkages

– Interrelationships with other business units



Cost Drivers (contd.)

Factors that affect costs

– Integration (and de-integration)

– Timing

• First mover advantage

• Timing vis-à-vis business cycle or market conditions

– Discretionary policies

– Location

– Institutional factors

• Regulations, Laws, Taxes & levies, Unionization…

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Cost Dynamics

Cost behavior of activities changes over time

Factors beyond firm’s control have impact on cost behavior



Cost Dynamics

Some factors that cause cost dynamics

– Industry real growth

– Differential scale sensitivity

– Different learning rates

– Differential technological change

– Relative inflation of costs

– Aging

– Market adjustment

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Controlling the Cost Drivers

Prioritize activities

– Some offer more potential for gaining cost advantage than others

Ascertain cost drivers that impact the high potential activities

Build strategies to control the cost drivers



Controlling the Cost Drivers (example)

Capacity Utilization

– Different pricing policies for peak and lean periods

– More advertising during lean periods

– Alternative uses of idle capacity

– Build optimum (not maximum) capacity; Borrow capacity during peak periods

– Convert “fixed” capacity to “variable” capacity

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Redefining the Value Chain

Adopting substantially different value chain (value activities) than competitors

Examples:

– Significantly different automation levels

– Different (or new) raw materials

– E-mail campaigns instead of event sponsorships

– Radically different manufacturing process

– e-learning instead of classroom training for employees



Ensuring Success in Cost Leadership

Relentless pursuit

Adequate top management attention

Firmwide communication and involvement

Training, motivation

Cross-departmental coordination

Regular measurement

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Avoiding Pitfalls

Study all costs, not just manufacturing costs

Give due importance to “procurement”

Cost of purchased items can be substantial

Manage and exploit linkages; Evaluate trade-offs between activities

Think different, not incremental

Do not sacrifice differentiation



Exercise: Case Study – Nucor Corporation

How does this case illustrate some of the points discussed in previous slides?

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Exercise: Case Study – Walmart

What activities of value chain has Walmart leveraged to attain cost leadership?

Note: Formerly branded as Wal-Mart, the company was rebranded as Walmart in 2008.



Exercise: Case Study – Emerson

What activities of value chain did Emerson leverage to attain cost leadership?

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Additional Reading

“How Emerson Rebounded from a Bad Loss”

– An excerpt from the book

• “Performance Without Compromise”

– by Charles F. Knight (former CEO of Emerson) with Davis Dyer



What We Covered Today

Cost Leadership

– Assignments of costs and assets

– Cost drivers, Cost dynamics, Controlling the cost drivers

– Redefining the value chain

– Ensuring success and avoiding pitfalls

– Case studies

• Nucor

• Walmart

• Emerson

B2B Mktg - Session 05c - Cost Leadership Students' Copy)

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