Session Outline

KSOM
• Competitive Positioning at the Business Level
• Value Creation Frontier
• Value Map
• Porter’s Generic Strategies
• The Strategic Logic of Cost Leadership
• Steps in Strategic Cost Analysis

@Ashok K. Sar SFM2010: Low Cost Leadership 1

 Competitive Positioning
at the Business Level
KSOM

@Ashok K. Sar SFM2010: Low Cost Leadership 2

 Competitive Positioning
and the Value Creation Frontier
KSOM

Value Creation Frontier

represents the maximum
value the products of
different companies inside
an industry can give
customers at any one time
by using different
business models.

Companies on the value

creation frontier have the
most successful strategy
in a particular industry.

@Ashok K. Sar SFM2010: Low Cost Leadership 3

 Generic Business Models
and the Value Creation Frontier
KSOM

Four Principal
Generic Strategies
1. Cost Leadership
2. Focused
Cost Leadership
3. Differentiation
4. Focused
Differentiation

@Ashok K. Sar SFM2010: Low Cost Leadership 4

 Value Map
KSOM

@Ashok K. Sar SFM2010: Low Cost Leadership 5

 The Five Generic
Competitive Strategies
KSOM Type of Advantage Sought
Lower Cost Differentiation

Broad Range Overall Low-Cost Broad

of Buyers Leadership Differentiation
Market Target

Strategy Strategy
Best-Cost
Provider
Strategy
Narrow Focused Focused
Buyer Low-Cost Differentiation
Segment
or Niche Strategy Strategy

@Ashok K. Sar SFM2010: Low Cost Leadership 6

 The Strategic Logic of Cost Leadership
KSOM
P, C,
Price, unit cost indifference
curve
E
PE
F Consumer Surplus Parity
PF
PE – PF < CE - CF

CE ↓
PF –CF > PE - CE
DC
Dq
CF

qF qE q, quality

@Ashok K. Sar SFM2010: Low Cost Leadership 7

 Conditions Suitable for
Seeking a Cost Advantage
KSOM
• When the nature of the product does not allow
benefit enhancement
• When consumers relatively price sensitive and
• When the product is a search good rather than an
experience good

@Ashok K. Sar SFM2010: Low Cost Leadership 8

 The Strategic Logic of Cost Leadership
KSOM
• Price its product below the rivals and sell more or
• Match rivals’ price and achieve better price-cost
margins
• Offering the same benefits as the competitors do
(differentiation parity)
• Offering a slightly lower benefit (differentiation
proximity) or
• Offering a qualitatively different product.

@Ashok K. Sar SFM2010: Low Cost Leadership 9

 Steps in Strategic Cost Analysis
KSOM
1. Identify value chain and assign costs & assets to it
2. Diagnose the cost drivers of each value activity &
how they interact with each other
3. Identify linkages
4. Identify competitors’ value chains, and determine
the relative cost of competitors & the source of
cost difference
5. Develop a strategy to lower cost position thru
controlling cost drivers or reconfiguring value chain
6. Protect differentiation parity/ proximity
7. Test the cost reduction strategy for sustainability

@Ashok K. Sar SFM2010: Low Cost Leadership 10

 Stage 1. Identify The Principal Activities
The Case Of Automobile Manufacture
KSOM

@Ashok K. Sar SFM2010: Low Cost Leadership 11

 Firm Infrastructure 9%
KSOM
Human resource management 2%
Technology development 9%
Procurement 1%
Inbound logistics 3%

1%

Margin
Outbound logistics 1%
40%

6%
Marketing &

Service 1 %
sales
27%

@Ashok K. Sar Purchased operating input

SFM2010: Low Cost Leadership Human resource costs 12
KSOM Firm Infrastructure 16%

Human resource management 1%

Technology development 2%
Procurement 1%

Marketing &sales 1%
8%
6% 15%

Service 2 %
38%
2% 5%

Inbound Operations 46% Outbound

Logistics Logistics
8% Fixed assets 20%
@Ashok K. Sar SFM2010: Low Cost Leadership 13
 Diagnose the cost drivers of each value activity &
how they interact with each other
KSOM

@Ashok K. Sar SFM2010: Low Cost Leadership 14

 Identify linkages
KSOM

@Ashok K. Sar SFM2010: Low Cost Leadership 15

 Identify competitors’ value chains, and
determine the relative cost of competitors
& the source of cost difference
KSOM
Process innovations Product redesign to reduce Technology
lowering production costs number of components development

Safety training for all employees reduces absenteeism, Human

resource
downtime, and accidents management

Reduced levels of management Computerized, integrated information General

cuts corporate overhead system reduces errors and costs administration

Favorable long-term contracts; captive suppliers or key customer

for supplier Procurement
Subcontracted
service
Global, online Economy of Computerized Cooperative technicians
suppliers scale in plant routing lowers advertising repair
provide reduces transportation with product
distributors correctly
automatic equipment expense first time
creates local or bear
restocking of costs and cost advantage costs
orders based depreciation in buying
on sales media space
and time
Inbound logistics
@Ashok K. Sar
Operations Outbound logistics Marketing & sales
SFM2010: Low Cost Leadership 16
 Develop a strategy to lower cost position
thru controlling cost drivers
KSOM
ECONOMIES OF SCALE • Indivisibilities
• Specialization and division of labor

ECONOMIES OF LEARNING • Increased dexterity

• Improved organizational routines

• Process innovation
PRODUCTION TECHNIQUES • Reengineering business processes

PRODUCT DESIGN • Standardizing designs & components

• Design for manufacture

• Location advantages
INPUT COSTS • Ownership of low-cost inputs
• Non-union labor
• Bargaining power

CAPACITY UTILIZATION • Ratio of fixed to variable costs

• Speed of capacity adjustment

RESIDUAL EFFICIENCY • Organizational slack; Motivation &

@Ashok K. Sar SFM2010: Low Cost Leadership
culture; Managerial efficiency 17
 Develop a strategy to lower cost position
thru reconfiguring value chain…
KSOM
• A different production process
• Difference in automation
• Direct sales instead of indirect sales
• A new distribution channels
• A new raw material
• Major differences in forward or backward vertical
integration
• Shifting the location of facilities relative to suppliers
and customers
• New advertising media

@Ashok K. Sar SFM2010: Low Cost Leadership 18

 Develop a strategy to lower cost position
thru reconfiguring value chain…
KSOM
• Reasons for cost advantage
– Presents the opportunity to fundamentally
reconfigure a firm’s cost, compared to settling for
incremental improvements.
• Eg. No-frills airlines (50% less cost)versus Trunk Airlines
– Altering the basis of competition in a way that favors a
firms strength.
• Eg. Carbo-thermic Reduction process versus. Alumina
route by Japanese firms to produce metal from Bauxite

@Ashok K. Sar SFM2010: Low Cost Leadership 19

 Develop a strategy to lower cost position
thru reconfiguring value chain…
KSOM
To identify new value chain
• How can the activity be performed differently or
even eliminated?
• How can a group of linked activities be recorded or
regrouped
• How might coalitions with other firms lower or
eliminate costs

@Ashok K. Sar SFM2010: Low Cost Leadership 20

 Protect differentiation parity/ proximity
KSOM

@Ashok K. Sar SFM2010: Low Cost Leadership 21

 Test the cost reduction strategy for
sustainability
KSOM
• Better positioned than RIVAL COMPETITORS to
compete offensively on basis of price
• Low-cost provides some protection from bargaining
leverage of powerful BUYERS
• Low-cost provides some protection from bargaining
leverage of powerful SUPPLIERS
• Low-cost provider’s pricing power acts as a
significant barrier for POTENTIAL ENTRANTS
• Low cost puts a company in position to use low price
as a defense against SUBSTITUTES

@Ashok K. Sar SFM2010: Low Cost Leadership 22