3.2 Cost-leadership Strategy

0:00hello and welcome to the next video in the third module in the course we are learning about business strategy my name is Robert and in previous video we have outlined the basic generic competitive strategies that's going to be called leadership differentiation and the focus strategy now as I have promised to you in this video we are going to start with first one of them so it's going to be cost leadership generic competitive strategy let's go straight ahead for the definition cause leadership strategy involves the lowest cost organization in a domain of activity there are now four key cons drivers that can help deliver a cost leadership I think cost leadership

0:41is an easiness generic competitive strategy to imagine for us well let's go for the four key drivers of how to be a successful calls leader first of all we have to focus on input costs that is quite clear whatever we produce may it be a piece of hardware may be a service we are going to have input cost because we certainly are going to have some labor so their salaries are our input cost and as well we are going to have some suppliers of maybe raw materials if we have a cafeteria we are going to be purchasing a coffee well now it depends what the costs are when it comes to this

1:22purchase of a coffee is it the high-end super expensive coffee or is the low and not so good tasting one so first of all we of course have to focus on any input cost but there is not too much to discuss here well there is much more to discuss or at the second point already when we talk about economies of scale I think this is a very well-known economical term the more company produces the lower the costs are going to be or the lower the unit cost is going to be well we have to understand two concepts there are always fixed costs and variable cost these two

2:00together are going to create a unit cost if we keep example of a cafeteria how much does it cost to produce for us one coffee and serve the customer that is going to be a you it cost to this unit cost as we have said there are going to be two contributors one is a fixed cost one is a variable cost so variable cost changes with every unit of output so for every coffee served we need to have a certain amount of coffee beans produced by us and this is a variable cost for us if we don't produce the next coffee we are not going to consume these coffee beans so

2:42we are not going to incur this cost however on the other side there are fixed costs so fixed costs can be the rent of our cafeteria now the idea become is of Kelly simple the larger output we have the lower the unit cost will be because of the fixed cost so if we pay 1,000 dollars in rent every month that is our fixed cost now if we serve 10 cups of coffee how much of these $1000 do we have to account as a cost to each coffee that we serve well we serve 10 coffees so it's going to be 100 dollars in cost for every cup

3:26of coffee that we serve well that is pretty pricey now if we serve 1,000 cups of coffee meaning we have much larger output that the average unit cost is much lower because now we have to account only for one dollar from our rent which is a fixed cost for every cup of coffee we serve that sounds much more realistic now I also have a nice drawing for you which which displays how economies of scale work now you see on the vertical axis we have the unit cost which as you can see it goes down and then it goes slightly up now we have on the horizontal axis the output per period

4:10maybe our period is one month so as you can see the more cups of coffee that we produce the longer is our unit cost until the moment we achieve minimum efficient scale this is the point that we need to achieve if you wanna be the cost leader however there is one interesting point the the unit cost goes slightly up again this is what we call these economies of scale it's not so much known conservatively we talk about economies of scale only now this economies of scale can happen for instance if we have our cafeteria and we are serving so much coffee that we all of a sudden have to pay our employees

4:52overtime so when when they have an hour extras and overtime because we have so many customers we just have to serve them well what's gonna happen is that the extra hour that they work outside of their usual library hours we're going to have to pay them triple for the downward you see our cost our unit cost is going to go up again so these economies of scale are also possible but they are not so common so this was the economy of scale as a second main contributing factor if we want to achieve a costly Dersch Apanui competitive strategy thirdly there is experience and I again have a drawing for you this one is very

5:35similar to the one where we talk about economies of scale you see we have the unit cost again on the vertical axis and cumulative output well essentially the same as in the previous drawing on the horizontal axis this time again the unit cost goes down as we are moving forward with our cumulative output we now we don't have this small bump at the very end so we don't have the disk economies of experience maybe well what does the idea of experience tell us the more we produce say we are having our cafeteria for 1 year 3 years or 10 years the more experienced we are and we can use this

6:18experience to achieve lower a unit cost so for instance if we keep the example of cafeteria well after seven years we really know how to be efficient when we are bringing the coffee to the table we know exactly how to do it so that we save Alfie seconds or maybe even minutes on how we do this one step that is simply experience and there are even two concrete points when it comes to experience and how cost can be saved here first of them is labor efficiency we already touched upon this our labor simply becomes more efficient if they are more experienced or the other way around we as managers can become more

7:02efficient in teaching our labor how to do the job so second point is efficient design we can design the product in a way if we have the experience so that we'd save cost with it so maybe we are now after 10 years of having our cafeteria able to tell me this coffee machine is going to be much more effective we can brew the coffee there in one minute instead of three minutes with all other coffee machines so we can by the design of our product how do we do our business process we can save some cost and become a cost leader again that was the third main key driver of how to

7:43become a course leader now before the last one and this one is about product or process design when we are designing the product or a process within our business we can design the cost leadership or cost efficiency by the outset from the very beginning so for instance if we have engineers and they are going to design a cell phone for us we can either tell them hey guys I will be a cost leader can you please engineer this cell phone from standard equipment from standard parts so these parts can be bought all over the internet all over the world they are so well known so they will be

8:26cheap or we can tell them hey I want a cell phone that will be the best in the world for that of course I understand that you will need specialized equipment you will need special part special manufacturing for that I understand that it's going to be more pricey that would be more of a differentiator high-end quality strategy but we are for now focusing on the cost leadership so we want to design the Khans leadership from the very outset into our product you can see even in the design we can save the costs and it was the fourth key driver for the cost leadership okay we now understand what

9:05caused leadership means and what are the four key drivers that can lead us to be the cost leader now there is later part of this video which are really laughs we are going to look at how it works in the market with profit margins with cost and so on and we need to understand two concepts one is parity and one is proximity so let's go for it this is an example of a market with four competitors we see their strategies or positions highlighted on horizontal axis average competitor cause leader with parity cons leader with proximity and differentiator look at the prices that these competitors offer differentiator

9:50offers much higher price but probably very differentiated and high-quality product what is of our interests more are the two cons leaders out of which the one with parroting offers higher price the thing is that the ensconce leader achieved parity or equivalence in his product offering to average competitor his product is cheaper to produce an equally good as the product of average competitor now cons leader with proximity has equally low cost of producing however this product is of lower quality as perceived by customers hence he needs to charge lower price than both average competitor and cons leader with parity this is an example of how it looks like in a real market and

10:44that is all for this video we defined ourselves a course leadership we discussed the main key drivers for becoming a cause leader and we looked at the particular market how it looks like with cost leadership and we touched upon parity and proximity in the upcoming videos we are going to talk about different generic competitive strategies such as differentiation or a focused strategy I'm looking forward to see you there