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 m ust not  dissipate the advantages  of scale through product proliferation. Interrelationships will not  lower cost unless af­ fected 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 leader­ ship. Everyone in a firm has the potential to affect cost. Cost leaders have cost control programs in every value activity, not only in manufac­ turing. 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 over­ stated. 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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