A Cost Advantaged Strategy is where a company leverages unique capabilities and resources to obtain lower costs that allow them to offer a lower price to grow market share, or make more profit than competitors at the industry average price.
What it is: A company can use economies of scale, learning, and experience, proprietary knowledge, lower-cost inputs, or a different business model to generate lower costs than their competitors in the industry. Achieving a lower cost position in the industry is the essence of a low-cost strategy.
What does it do: A low-cost strategy allows a company to achieve a higher profit than the average competitor in the industry when selling at the industry average price, or grow market share by selling products at prices below the industry average. Increased profits or increased market share without sacrificing industry average profits are valuable outcomes to a low-cost strategy. Either scenario can create increased total earnings for a company with a low-cost strategy.
Uses:
How is it used: Companies who have achieved a low cost position will often use that low cost to then lower their price without lowering their profit. With a lower price a company can grow their market share and therefore have higher revenues and larger total profits. Another approach is to use the lower costs to increase the percentage of profit per dollar of revenue. Therefore, the low-cost competitor can make more profit while having the same level of revenues as competitors. Either approach causes the low-cost competitor to make either more total dollars of profits or higher percentage profit, than the average competitor in the industry.
Where: Large undifferentiated industries often have a low cost leader who ends up being the largest market share leader. Because customers will not pay for differentiated products, the way to make more money than the other competitors in the industry is to have a lower cost. Many companies leverage that lower cost by selling at a lower price than the industry average allowing them to grow market share ad total revenues while maintaining the industry average percent profitability. You can also use a low cost position in a differentiated industry by using proprietary knowledge or scale to make the differentiated products at a lower cost than other competitors.
Why: The low-cost producer in an industry can never be put out of business by competitors because they can never lower their prices as low as the low-cost producer. There is safety in being the low-cost producer as long as your product meets the minimum standard of quality and performance required by the buyers in the industry.
Limitations:
Where it shouldn't be used: In the luxury industry, where brand image is the driver of the purchase decision, a low-cost provider will most of the time be unable to compete with the more differentiated competitors.
Any restrictions: Low-cost positions are hard to sustain. So investing in low-cost strategies that are not sustainable will be quickly met by competitors. Therefore look for sustainable capabilities to sustain competitive advantage in low-cost positions.
Warnings: Lowering costs to the extent that you no longer meet the minimum requirements of the customers will cause you to lose market share to your competitors.
Gathering data: Define all of the activities that cost money and resources to complete. Determine which of these activities are completed by each competitor
Manufacturing production activities including both fixed cost and variable cost inputs
Research and development costs to create, innovate and develop products and applications
Supply Chain to purchase, manage raw material inventory, Finished goods inventory, shipping, terminalization, customer service, accounts receivable, etc.
Human resource, benefits, and people management expenses
Sales and marketing people and expenses in attracting, converting and monetizing customers
Governance and overhead costs and resources
And many other costs too numerous to mention
List all the activities that cost money and resources for each function in your company necessary to provide products and services
Research to determine where competitors activities might be different from yours and map their projected activities
Estimate where competitor activities can be completed for a lower cost or resources and determine why they can do this
Analysis of data: Determine your own cost of producing and supplying your product and where it differs from your competitors by adding up the costs of each activity
Using the data above calculate your own cost per activity and the total cost of providing your product for sale
Determine at each activity where competitors could have different costs per activity
Using the differences estimated from the analysis above, project how much different your competitors' costs are for the same activities
Estimate what is the cost of unique activities for each competitor
Add up the costs of all activities and determine the total cost for each competitor of providing products for sale
Interpretation of results: Compare the cost positions of each competitor and determine who has a low-cost position.
Economics of Scale - when you have more volume of production you can spread your fixed costs across a larger volume achieving a lower fixed cost per unit produced.
Learning and Experience can create cost reductions over time. See the demonstration video above called "How to Create a Scale or Experience Curve"
Proprietary Knowledge can create competitive cost positions. This could be process knowledge or patented process positions, or formulation experience, etc.
Different Business Model can create cost advantages by eliminating activities or modifying the activities so that the resources required are reduced
Try to identify what factors drive the lower costs for yourself and each competitor. Common drivers of lower-cost include:
Also look for activities you could change or ways you could complete activities for lower cost to allow you to have a lower cost strategy than you currently have.
Presentation of results: Showing income statements for each competitor as an overview. They have tables that compare the activities of each competitor and their projected cost per activity
There are three levels of output representation and recommendations. Each of the options below has its role and primary audience:
Detailed Tables depicting the different activities and associated costs and their impact on total costs. These tables can be for a single product, can compare products, or compare between competitors. These are for engineers and those managing the manufacturing process
Charts and graphs that highlight sources of costs and depicts differences between products and competitors. All managing functions can use this information (marketing, HR, finance, etc.)
Recommendations that are supported by key charts and graphs or targeted tables that highlight why the recommendation should be implemented. These presentations are for top managers making decisions about resource allocation.
cost-analysis-template simple.xlsx
cost-analysis-Planning guide.pdf
cost-benefit-analysis-tool.xls
