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.