OVERALL COST LEADERSHIP

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.

 

Value chain analysis

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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