Strategic Management: Formulation and Implementation

Sustainability Of Cost Advantage

Cost advantage will result in above-average performance only if the firm can sustain it. Sustainability varies for different cost drivers and from one industry to another. Timing and integration can also be sources of sustainable cost advantage.

Moreover, sustainability stems not only from the sources of the cost advantage, but also from their number.

Pitfalls In Cost Leadership Strategies

Some of the most common errors made by firms in assessing and acting upon cost position include:

Exclusive focus on the cost of manufacturing activities
An examination of the entire value chain often results in relatively simple steps that can reduce cost position.
Ignoring procurement
Modest changes in purchasing practices could yield major cost benefits for many firms.
Overlooking indirect or small activities
Indirect activities, such as maintenance and regulatory costs often escape attention altogether.
False perception of cost drivers
Firms often misdiagnose their cost drivers.
Failure to exploit linkages
Firms rarely recognize all the linkages that affect cost, particularly linkages with suppliers and linkages among activities such as quality assurance, inspection, and service.
Contradictory cost reduction
Cost drivers sometimes work in opposite directions, and a firm must recognize the tradeoffs.
Unwitting cross subsidy
Firms often engage in unwitting cross subsidy when they fail to recognize the existence of segments in which cost behave differently.
Thinking incrementally
Cost reduction efforts often strive for incremental cost improvements in the existing value chain, rather that finding ways to reconfigure the chain.
Undermining differentiation
Cost reduction can undermine differentiation if it eliminates a firm's sources of uniqueness to the buyer.