Cost Leadership Strategy

An integrated set of actions designed to produce or deliver goods or services at the lowest cost, relative to competitors with features that are acceptable to customers.
relatively standardized products features acceptable to many customers lowest competitive price
For example, Apple

Cost Leadership Strategy

Aiming to become Lowest Cost Producer The firm can compete on the price with every other industries and earn higher unit profits. Cost reduction provides the focus of the organizations strategy. Targets a broad market Competitive advantage is achieved by driving down costs. A successful cost leadership strategy requires that the firm is the cost leader and is unchallenged in this position. Especially beneficial : where customers are price sensitive For example, Wal-mart

Cost Leadership Strategy

3 ways to achieve this:
Economies of scale low direct and indirect operating costs control over the supply chain

Cost Leadership Strategy

Cost saving actions required by this strategy:
building efficient scale facilities tightly controlling production costs and overhead minimizing costs of sales, R&D and service building efficient manufacturing facilities monitoring costs of activities provided by outsiders simplifying production processes For example, Reliance Industries

How to Obtain a Cost Advantage

Determine and control Reconfigure, if needed

Cost Drivers

Value Chain

Change in automation New distribution channel New advertising media Direct sales in place of indirect sales

Forward integration
Backward integration Example, Dell

Cost Drivers

Economies of scale Asset utilization Capacity utilization pattern Seasonal, cyclical Interrelationships Order processing and distribution Value chain linkages Marketing & sales Logistics & operations Service

Product features Performance Mix & variety of products Service levels Small vs. large buyers Process technology Wage levels Product features Hiring, training, motivation

Type Industry

: :

Public Beverage

Founded
Founder(s) Headquarters Area served Employees Flavor

:
: : : : :

1886
Asa Griggs Candler Coca-Cola headquarters, Atlanta, Georgia, U.S. Worldwide
Approx. 1.3 millions (Dec, 2013)

Cola, Cola Cherry, Cola Vanilla, Cola Green Tea, Cola Lemon, Cola Lemon Lime, Cola Lime, Cola Orange and Cola Raspberry.

Brands

Coca cola
Focusing on cost leadership through disciplined working capital management and tight operating expenses control. Optimization of the production and distribution infrastructure Personal cost ownership throughout the organization Logistic excellence Daily Average serving to 1.8 million people

Coca cola
Ensure the strongest and most efficient production, distribution, and marketing systems possible The established Coca-Cola, Business Services Organization (BSO) that standardizes, centralizes, coordinates and simplifies certain Finance and Human Resources processes to improve productivity and provide important transactional services at a lower cost

Success Mantra
Access to the capital required to make a significant investment in production assets. Design skills for efficient manufacturing High level of expertise in manufacturing process engineering Efficient distribution channels

Cost Leadership Strategy and the Five Forces of Competition

Rivalry Among Competing Firms
Five Forces of Competition

Bargaining Power of Suppliers

Can use cost leadership strategy to advantage since: competitors avoid price wars with cost leaders, creating higher profits for the entire industry

Cost Leadership Strategy and the Five Forces of Competition

Bargaining Power of Buyers
Can mitigate buyers power by: driving prices far below competitors, causing them to exit and shifting power with buyers back to the firm

Five Forces of Competition

Bargaining Power of Suppliers

Cost Leadership Strategy and the Five Forces of Competition

Bargaining Power of Suppliers
Five Forces of Competition

Bargaining Power of Suppliers

Can mitigate suppliers power by: being able to absorb cost increases due to low cost position being able to make very large purchases, reducing chance of supplier using power

Cost Leadership Strategy and the Five Forces of Competition

Threat of New Entrants
Can frighten off new entrants due to: their need to enter on a large scale in order to be cost competitive the time it takes to move down the learning curve

Five Forces of Competition

Bargaining Power of Suppliers

Cost Leadership Strategy and the Five Forces of Competition

Threat of Substitute Products
Five Forces of Competition

Bargaining Power of Suppliers

Cost leader is well positioned to: make investments to be first to create substitutes buy patents developed by potential substitutes lower prices in order to maintain value position

Pitfalls of Overall Cost Leadership Strategies

Too much focus on one or a few value-chain activities. All rivals share a common input or raw material. The strategy is initiated too easily. A lack of parity on differentiation Erosion of cost advantages when the pricing information available to customers increases.

Risks of Cost Leadership Strategy

There can only be one cost leader. Technological change can eliminate cost advantage. Processes used by the cost leader to produce and distribute its good or service could become obsolete because of competitors innovations. Competitors may learn how to successfully imitate the cost leaders strategy.

Risks of Cost Leadership Strategy

It could lead to a damaging price wars. There might be difficulty in sustaining cost leadership in the long run. A firm following a focus strategy might be able to achieve even lower cost within their segment. Lower customer loyalty