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global economy.

1. Cost Leadership – Organizations compete for a wide customer based on price. Price is based on internal efficiency in order to have a margin that will sustain above average returns and cost to the customer so that customers will purchase your product/service. Works well when product/service is standardized, can have generic goods that are acceptable to many customers, and can offer the lowest price. Continuous efforts to lower costs relative to competitors is necessary in order to successfully be a cost leader. This can include:

  • Building state of art efficient facilities (may make it costly for competition to imitate)
  • Maintain tight control over production and overhead costs
  • Minimize cost of sales, R&D, and service.


Porter’s 5 Forces Model 

Earlier we discussed Porter’s Model. A cost leadership strategy may help to remain profitable even with: rivalry, new entrants, suppliers’ power, substitute products, and buyers’ power.

  • Rivalry – Competitors are likely to avoid a price war, since the low cost firm will continue to earn profits after competitors compete away their profits (Airlines).
  • Customers – Powerful customers that force firms to produce goods/service at lower profits may exit the market rather than earn below average profits leaving the low cost organization in a monopoly positions. Buyers then loose much of their buying power.
  • Suppliers – Cost leaders are able to absorb greater price increases before it must raise price to customers.
  • Entrants – Low cost leaders create barriers to market entry through its continuous focus on efficiency and reducing costs.
  • Substitutes – Low cost leaders are more likely to lower costs to entice customers to stay with their product, invest to develop substitutes, purchase patents.

How to Obtain a Cost Advantage? 

  • Determine and Control Cost
  • Reconfigure the Value Chain as Needed

Risks

  • Technology
  • Imitation
  • Tunnel Vision

Value Chain – A framework that firms can use to identify and evaluate the ways in which their resources and capabilities can add value. The value of the analysis lays in being able to break the organization’s operations or activities into primary (such as operations, marketing & sales, and service) and support ( staff activities including human resources management & procurement) activities. Analyzing the firm’s value-chain helps to assess your organizations to what you perceive your competitors value-chain, uncover ways to cut costs, and find ways add value to customer transactions that will provide a competitive advantage. 


2. Differentiation – Value is provided to customers through unique features and characteristics of an organization’s products rather than by the lowest price. This is done through high quality, features, high customer service, rapid product innovation, advanced technological features, image management, etc. (Some companies that follow this strategy: Rolex, Intel, Ralph Lauren) 

Create Value by:

  • Lowering Buyers’ Costs – Higher quality means less breakdowns, quicker response to problems.
  • Raising Buyers’ Performance – Buyer may improve performance, have higher level of enjoyment.
  • Sustainability – Creating barriers by perceptions of uniqueness and reputation, creating high switching costs through differentiation and uniqueness.