Cost-Leadership Strategy

Topics: Economics, Strategic management, Cost Pages: 7 (1852 words) Published: August 27, 2007
Definition: 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 sustained competitive advantage depends on that strategy being rare and costly to imitate.

Sources of cost advantage•Economies of scaleEconomies of scaleOne of the most cited sources of cost advantage for a firm is its SIZE. There is a relationship between firm size measured in terms of volume of production - and costs - measured in terms of average costs per unit of production. The optimal volume of production is reached when the average costs per unit of production is minimum.

Sources of economies of scale :volume of production and specialized machines : Accompany with a high level of production, it is able to purchase and use specialized manufacturing tools that cannot be kept in operation in small companies.

volume of production and cost of plant and equipment : A high volume of production may allow a firm to build larger manufacturing operations. Large-volume firms will be able to build lower per unit cost manufacturing operations and will have lower average costs of production.

volume of production and employees specialization : High volumes of production are also associated with high levels of employee specialization. Adam Smith first observed that cost advantages may be associated with the division of labor.

volume of production and overhead costs : A firm with high volumes of production can spread its overheads costs (accounting, control, R&D,..) over more unitsDiseconomies of scaleSources 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 on the relationship between firm size, employee specialization and employee motivation. One of the advantages of high volumes of production is that it allows workers to specialize 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, etcdistance 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 curveThe learning-curve model attempts to relate the volume of production and coats over time. Economies of scale focuses on the relationship between the volume of production at a given point in time and average unit costs. The learning-curve focuses on the relationship between the cumulative volume of production and average unit costs.

•Differential Low-Cost Access to Factors of ProductionDifferential 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 ScaleA 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...
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