Cost leadership strategy
A firm pursuing a cost-leadership strategy attempts to gain a competitive advantage primarily by reducing its economic costs below its competitors.
If cost-leadership strategies can be implemented by numerous firms in an industry, or if no firms face a cost disadvantage in imitating a cost-leadership strategy, then being a cost leader does not generate a sustained competitive advantage for a firm. The ability of a valuable cost-leadership competitive strategy to generate a sustainted competitive advantage depends on that strategy being rare and costly to imitate.
Sources of cost advantage
* Economies of scale
Economies of scale
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.) over more units
Diseconomies of scale
Sources of diseconomies of scale :
physical limits to efficient size : There are physical limitations to the size of some manufacturing processes.
managerial diseconomies : As a firm increases in size, it often increases in complexity, and the ability of managers to control and operate it efficiently becomes limited.
worker motivation : A third source of diseconomies of scale depends ont hte relationship between firm size, employee specialization and employee motivation. One of the advantages of high volumes of production is that it allows workers to specalize in smaller and more narrowly defined production tasks. However, researches suggest that these types of specialized jobs can be demotivating for employees and can affect productivity and quality. Solutions have been experienced : participation schemes, quality circles, etc
distance to markets and suppliers : A source of diseconomies of scale can be the distance between a large manufacturing facility and the place where the goods are sold, or the places where essential raw materials are purchased (large transportation costs).
* The learning curve
The learning-curve model attempts to relate the volume of production and coats over time. Economies of scale focuses on the relatrionship between the volume of production at a given point in time and average unit costs. The learining-curve focuses on the relationship between the cumulative volume of production and average unit costs.
* Differential Low-Cost Access to Factors of Production
Differential low-cost access to factors of production may create cost differences among firms producing similar products in an industry. Factors of production are any inputs used by a firm in conducting its business activities. They include labor (human resources), capital, land, raw materials, knowledge)
* Technological Advantages Independant of Scale
A possible source of cost advantage - not depending on economies of scale - may be the different technologies that firms employ to manage their business. Technologies include not only technological hardware of companies but also technological software of firms (quality of relations among labor and management, an organization's culture, the quality of managerial controls). All these characteristics of a firm have an impact on a firm's economic costs.
* Policy Choices
In general firms that attempt to implement a cost-leadership strategy will choose to produce relatively simple standardized products that sell for relatively low prices compared to the products and prices of firms pursuing other business or corporate strategies.
When does a low-cost producer strategy work best ?
* When price competition among rival sellers is a dominant competitive force
* When the industry's product is a standard, commodity-type item readily available from a variety of sellers
* When there are not many ways to achieve product differenciation that have...