Implementation and Cost Advantage

This chapter has focused on how to achieve a cost advantage through changes in strategy and the way activities are performed. However, the success of cost leadership hinges on a firm’s skills in actually implementing it on a day to day basis. Costs do not go down automatically or by accident but rather as a result of hard work and constant attention. Firms differ in their abilities to lower costs, even when they have similar scale or cumulative volumes or when guided by similar policies. Improving relative cost position may not require a major shift in strategy so much as greater management attention. A firm should never assume its costs are low enough.

Figure 3-3. Gallo’s Source of Cost Advantage in Wine

No cost driver works automatically. Scale economies are not achieved in an activity unless a firm’s other activities are coordinated to provide the inputs necessary to operate smoothly at large scale. Policy choices must not dissipate the advantages of scale through product proliferation. Interrelationships will not lower cost unless affected business units actually coordinate their behavior. Learning curve advantages do not occur unless a firm’s management strives to capture them.

A number of factors, including the training and motivation of employees, the firm’s culture, the adoption of formal cost reduction programs, a constant pursuit of automation, and a strong belief in the learning curve contribute to a firm’s ability to achieve cost leadership. Everyone in a firm has the potential to affect cost. Cost leaders have cost control programs in every value activity, not only in manufacturing. They compare activities against themselves over time, and among business units and competitors. The importance of symbolic factors in creating the climate for cost reduction also cannot be overstated. Successful cost leaders usually pay a great deal of attention to discretionary costs, in addition to tuning their strategy to achieve minimum operating costs.

Source: Porter Michael E. (1998), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press; Illustrated edition.

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