Overall Cost Leadership
An overall cost leadership strategy concentrates
attention on a company’s value chain resulting in low-cost products and
services. Little attempt is made to differentiate products or services from
those of competitors, and a wide net is cast over the entire potential market.
By offering the lowest possible cost, these companies gain market share through
price alone. The most succesful companies are those that limit down costs at
each point in the value chain.
An example of a company that uses low costs at each point
in the value chain is EasyJet. The customers of EasyJet have been using the
internet for making bookings. In addition to that, EasyJet has been offering no
in-flight meals, no in flight movies. Also, only one type of aircraft is used,
in order to minimise maintenance costs.
Internet technology offers new ways for overall cost
leaders to minimise costs. Indeed, at time the entire cost structure can be
altered, affecting every firm in the industry. The internet offers the potential
for cost leaders to decrease prices through decreased transaction costs. This
happens not only in B2C companies, but also in B2B companies. This forces firms
to re-examine transaction costs- from procurement to distribution and
after-sale service.
In order to successfully compete in the internet economy,
overall cost leaders must critically examine each input in the value chain. For
example, “dot com” companies such as monster.com have given firms inexpensive
access to a large, technically competent labour pool. Rather than manually
sorting through a paper resumes, human resource managers can screen potential
applicants by entering sorting criteria that match the firm’s needs to an
individual’s qualifications.
The consept of value chain
provides important insights as to how internet based technologies have helped
firms in controlling costs. Value chain analysis (described by Michael Porter
in his book “Competitive Advantage”)
views the organisation of a sequential process of value creating activities.
This approach is divided into two types of value-adding activities- primary and
support. Primary activities contribute to the physical creation of the product
or servie, its sale and transfer to the buyer and its service after the sale.
Support activities (procurement, human resources management, technology
development and firminfrastructure) add value through important relationships
with both primary activities andother support activities.
In terms of competitive
advantage, the internet offers overall cost leaders new abilities to reduce
costs in primary activities such as marketing (i.e B2C e-commerce) and support
activities such as purchasing (e.g. on-line auction procurement). Firms using
an overall cost leadership strategy can use internet-based technologies to
reduce value chain costs in a variety of ways:
·
Web-based inventory control systems that reduce
storage costs by providing realtime ordering and scheduling to manage demand
more efficiently;
·
Direct access to status reports and the ability for
customers to check work-in-progress to minimise rework;
·
On-line bidding and order processing to eliminate
the need for sales calls and decrease sales force expences;
·
On-line purchase orders for paperless transactions to
reduce costs of both the supplier and purchaser;
·
Collaborative design efforts to reduce the cost,
efficiency, and cycle time of new
product development;
·
On-line testing and evaluation of job applicants by
human resource departments.
Another benefit of internet
technology is lower transaction costs at multiple levels in value chain
activities. Such lower costs benefit fist movers especially. However the
sustainability of competitive advantages may be problematic: as rivals mimic
successful strategies, first movers loose their initial advantages.
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