Session 05c

Cost Leadership

B2B Marketing Sri Balaji Society 2010-12 (Sem I)

Agenda

Cost leadership
Aim Key factors

Steps in cost leadership strategy Case studies

Girish Ketkar

B2B Marketing Sri Balaji Society 2010-12 (Sem I)

Session 05c

Reading

Competitive Advantage (Michael E. Porter)

Chapter 3: Cost Advantage

Girish Ketkar

B2B Marketing Sri Balaji Society 2010-12 (Sem I)

Session 05c

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

Girish Ketkar

B2B Marketing Sri Balaji Society 2010-12 (Sem I)

Session 05c

Cost Leadership

Girish Ketkar

B2B Marketing Sri Balaji Society 2010-12 (Sem I)

Session 05c

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--vis competitors Build strategy to control cost drivers Reconfigure the value chain Test for sustainability
B2B Marketing Sri Balaji Society 2010-12 (Sem I)

Girish Ketkar

Session 05c

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

Girish Ketkar

B2B Marketing Sri Balaji Society 2010-12 (Sem I)

Session 05c

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

Girish Ketkar

B2B Marketing Sri Balaji Society 2010-12 (Sem I)

Session 05c

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

Girish Ketkar

B2B Marketing Sri Balaji Society 2010-12 (Sem I)

Session 05c

Cost Drivers

(contd.)

Factors that affect costs

Integration (and de-integration) Timing
First mover advantage Timing vis--vis business cycle or market conditions

Discretionary policies Location Institutional factors

Regulations, Laws, Taxes & levies, Unionization

Girish Ketkar

B2B Marketing Sri Balaji Society 2010-12 (Sem I)

Session 05c

Cost Dynamics

Cost behavior of activities changes over time

Factors beyond firms control have impact on cost behavior

Girish Ketkar

B2B Marketing Sri Balaji Society 2010-12 (Sem I)

Session 05c

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

Girish Ketkar

B2B Marketing Sri Balaji Society 2010-12 (Sem I)

Session 05c

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

Girish Ketkar

B2B Marketing Sri Balaji Society 2010-12 (Sem I)

Session 05c

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

Girish Ketkar

B2B Marketing Sri Balaji Society 2010-12 (Sem I)

Session 05c

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

Girish Ketkar

B2B Marketing Sri Balaji Society 2010-12 (Sem I)

Session 05c

Ensuring Success in Cost Leadership

Relentless pursuit Adequate top management attention Firmwide communication and involvement Training, motivation Cross-departmental coordination Regular measurement

Girish Ketkar

B2B Marketing Sri Balaji Society 2010-12 (Sem I)

Session 05c

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

Girish Ketkar

B2B Marketing Sri Balaji Society 2010-12 (Sem I)

Session 05c

Exercise: Case Study Nucor Corporation

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

Girish Ketkar

B2B Marketing Sri Balaji Society 2010-12 (Sem I)

Session 05c

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.

Girish Ketkar

B2B Marketing Sri Balaji Society 2010-12 (Sem I)

Session 05c

Exercise: Case Study Emerson

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

Girish Ketkar

B2B Marketing Sri Balaji Society 2010-12 (Sem I)

Session 05c

10

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

Girish Ketkar

B2B Marketing Sri Balaji Society 2010-12 (Sem I)

Session 05c

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

Girish Ketkar

B2B Marketing Sri Balaji Society 2010-12 (Sem I)

Session 05c

11