COST STRATEGY TO GAIN COMPETITIVE ADVANTAGE

WHAT IS COST STRATEGY ? HOW TO GAIN COMPETITIVE ADVANTAGE THROUGH COST STRATEGY ?

Cost analysis occupies an important place in business strategy. In order to gain and sustain competitive advantage, a firm should not only monitor its cost performance but also should endeavour to control it. Several strategic decisions like fixation of competitive prices, provision of after-sale services, quality of the products etc. depend upon relative cost level of the business firm. The role of cost in different market conditions is to be examined. The Experience Curve analysis is also important to derive the cost strategy of a firm. Michael Porter in his book Competitive Advantage suggested three generic competitive strategies aiming to develop a dependable position in the long-run and out-perform the competitors. These three strategies are:

 

1.   Cost Leadership,

2.   Differentiation,

3.  Focus. 

 

All the three strategies can either be used individually or in combination to each other. Figure-1 shows a matrix of the three generic competitive strategies and their interrelationship given by Porter.

 

 

Figure-1 : Three Generic Competitive Strategies 

READ MORE >>

READ MORE...

EXPERIENCE CURVE AND ITS CAUSES

EXPERIENCE CURVE AND WHAT IS THE CAUSES OF EXPERIENCE CURVE EFFECT ?

Cost has been correlated with the accumulated experience (of say production) by the Experience Curve Effect. The underlying principle behind the experience curve is that as total quantity of production of a standardised item is increased, its unit manufacturing cost decreases in a systematic manner. The concept of the experience curve was presented by BCG in 1966 and since then it has been accepted as one of the important phenomenon.

 

The experience curve is a rule of thumb. It says “costs of value added net of inflation will characteristically decline 25% to 30% each time the total accumulated experience has been doubled” (Henderson, 1989). This is also known as learning curve. Initially, this inverse relationship was discovered for the learning costs which are the costs for direct labour input in the manufacturing cost. Thus, as the production of a particular item (such as aircraft components) increased, the quantum of time of direct labour component to make each of these successive items declined. This helped the aircraft manufacturers to predict the cost of man-hours required to manufacture in future, say the number of aircraft, and helped them to fix the price accordingly. The Experience Curve Effect phenomenon, where costs fall with accumulated volume of experience, was known to industrial managers for many years. It took momentum as a tool in business strategy after Boston Consulting Group (BCG) provided the concept.

 

Let us take an illustration to understand this concept. When one starts the production of a new product (2 units), the unit cost is, say Rs. 100. Then, as the accumulated production volume reaches 4 units, the unit cost is reduced by say 20%, to Rs. 80. Furthermore, as the accumulated production reaches 8 units, the cost gets reduced by another 20%, to only Rs. 64, and so on. This trend has been tabulated in Table -1 

Table-1 : 80% Experience Curve

 
The data of this table when plotted on a plain graph, it gives an 80% Experience Curve, as shown in Figure-1. The Experience Curve has a hyperbolic shape.

READ MORE >>

READ MORE...