Presentation
on
“Low Cost Leadership”
Presented by: Group7
What is Low Cost Leadership?
• The main aim is to reduce the cost of production so that they can receive a
sufficient margin of profit on sale , as they sell the products for lower
price.
• The company's focus throughout each of its primary and secondary value-
creating activities is on:
simplification of processes and procedures
achieving efficiency and effectiveness
reducing costs
• Companies that choose a cost-leadership strategy offer relatively
standardized products with features or characteristics that are acceptable to
customers--in other words, with a minimum level of differentiation--at the
lowest competitive price
• They implement cost cutting technologies, stress reductions in
expenses and wastages and use volume sales techniques to boost
earnings
• A cost leader is able to use its cost advantage to charge lower prices
or to enjoy higher profit margins.
• This strategy involves the firm winning market share by appealing
to cost-conscious or price-sensitive customers. This is achieved by
having the lowest prices in the target market segment, or at least the
lowest price to value ratio.
• To succeed at offering the lowest price while still achieving
profitability and a high return on investment, the firm must be able
to operate at a lower cost than its rivals.
• Companies that wish to be successful by following a cost-leadership
strategy must maintain constant efforts aimed at lowering their
costs) and creating value for customers.
Cost reduction Strategies
Improving supply and distribution efficiencies.
1. Bulk buying to enjoy quantity discounts
2. Squeezing suppliers on price
3. Instituting competitive bidding for contracts,
4. Using methods such as Just-in-Time purchasing or Vendor-Managed
Inventory.
Low operating costs
1. Offering high volumes of standardized products
2. Limiting customization and personalization of service.
3. Using fewer and standard components
4. Limiting the number of models.
Gaining unique access to a large source of lower cost materials
1. Maintaining long term contracts with suppliers
Reduction in overhead and administrative expenses
1. Access to large pool of cheap labour
2. Locating premises in low rent areas
3. Establishing a cost-conscious culture
Making optimal outsourcing
1. Gives you access to professional capabilities
2. Frees up human resources
Improving processes
1. Identify, analyze and improve existing processes
2. Reduce wastages
Integration decisions
Common required Skills and
Resources
• Products designed for ease of manufacture.
• Process engineering skills
• Intense supervision of labor
• Sustained capital investment and access to capital
• Improving process
Common Organizational Requirements
• Tight cost control
• Frequent, detailed control reports
• Incentives based on meeting competitive targets.
Merits and Demerits of
Low Cost Leadership
Merits
Firms can effectively defend itself during price wars
Attack competitors on price to gain market share.
Benefit from exceptional returns.
Demerits
Competitors may imitate
Technology used may change
Lower customer loyalty, as price-sensitive customers
will switch once a lower-priced substitute is available.
May result in a reputation for low quality.
Examples
• Wal-Mart
Wal-Mart's founder, Sam Walton, developed the every day
low prices (EDLP) strategy.
Wal-Mart developed close relationships with its suppliers and
vendors.
Wal-Mart also developed its own distribution network.
• McDonalds
McDonalds also developed a strong division of labor for its
production processes, tight management control and product
development strategy.
Creating a strong top-down style of management is another leading
cost strategy for McDonalds.
Using fewer in-store managers allows the company to hire lower-
wage workers to complete tasks.
Limiting autonomy is also central to avoiding costly and
unnecessary restaurant expenditures like improvements or altering
business processes.
• Dell
Dell is able to establish itself as the low-cost leader in the PC
market, mainly due to its direct sales business model .
It has also achieved incredible efficiencies via its supply-
chain strategies
• Spice Jet
Spice jet has achieved low cost through the following ways
A single passenger class
A single type of air plane, reducing service and training costs
No- frills such as food, drinks, etc
Emphasis on direct selling of tickets through internet, direct
phone lines avoiding fee and commission paid to agents
Single air hostess per flight
48 seater air craft to lower maintenance and service fee
Prices are almost 50% lower than full service airlines
• Tata Nano
Tata Nano achieved low cost through the following ways
There is more usage of plastic and composite materials which in turn
cut down manufacturing cost.
In addition, the cost of tooling plastic was half that of a conventional
metal-based tooling system.
Bulk buying of materials through long-term contracts
Obtaining lower-interest charges when borrowing from banks
Having access to a greater range of financial instruments
Spreading the cost of advertising over a greater range of output in
media markets.
• Vodafone- Essar
When Vodafone entered Indian markets, Vodafone Essar launched
low priced cell phones in India under the Vodafone brand, and also
co-branded handsets sourced from major global vendors.
By bringing in millions of low-cost handsets from across the globe
into India, Vodafone Essar distributed bundled handsets through its
existing 400,000 distribution outlets.
By flooding the market with its low-cost handsets, Vodafone also
became a mass mobile phone brand like Nokia, Samsung, Motorola,
and Sony Ericsson in addition to continuing as telecom services
provider.
• Subhiksha
Retail store Subhiksha is known for its quality products and
affordable price. Subhiksha has been able to achieve this
because it has achieved efficiencies in its supply chain process
and has maintained close relationships with its suppliers and
vendors.
Thank You
