Cost advantage

From CEOpedia | Management online

Cost advantage over competitors is the result of the low costs strategies, and require significant cost reduction, marginal cost reduction, material and tooling cost optimization. The cost advantage occurs when the services or products produced are at a less cost than in competing companies. Then you can produce more products or provide more services than the competition. Organization has a cost advantage as produce or services less cost than their competitors. It also requires improvement of product technologies and expansion of the range of related products in order to spread costs and increase the sales volume. When a company reaches a cost advantage it can invest them in new devices and equipment allowing to maintain the position of a cost leader. Cost advantage may be achieved by moving company to the country with cheaper labour cost or lest restrictive environmental requirements. The strategy of cost advantage is usually chosen by large enterprises with a dominant position on the market. They therefore play the role of a price leader in the sector. These strategies are used when the products are mass-produced.

Competitive advantage in terms of costs

Is a function of a organization`s value chain. A company's cost situation reflects the total cost of operations all its worth activities in relation to competitors. Every action has cost factors that specify potential generator of a cost advantage. Organization's capability to differentiate itself show participation every worth toward customer needs. Therefore, in every activity the company should strive for a cost advantage. These activities should be not only at the production stage but also but also in other company activities, for example delivery. Cost optimization may require compromises. For instance, a company realizing an expensive project or producing from expensive raw materials shoul reduce delivery costs. A company must solve compromises, in according with company strategy, to gain competitive advantage. Cost advantage is one of way an organization can make a competitive advantage. This advantage puts the company in a high position to gain market participation and increase profitability (Michael E. Porter, Victor E. Millar 1985)

Ways how you can get a cost advantage:

  • access to cheaper materials or raw materials,
  • cheap production solutions,
  • effective processes,
  • technology that gives benefits,
  • reducing the costs of gain, processing and transfer information,
  • avoiding unnecessary costs,
  • advantageous location,
  • low delivery costs,
  • qualified employees.

Opportunities and worse side

Opportunities offered by a cost advantage in companies:

  • get more profit cause costs are lower than in competing companies at the same sale prices,
  • cut prices below prices determined by competitors to attract more clients and gain an advantage in the market,
  • protects against suppliers, as the company has greater flexibility with increases in prices of raw materials.

Worse side of the cost advantage:

  • technical changes can happen in a given industry so quickly that the company will not be able to financially meet new equipment purchases,
  • company focused on reducing costs may not see other important needs.

Examples of Cost advantage

  • Economies of Scale: This is the most common cost advantage. It is a business strategy that involves increasing the production capacity and reducing the cost of production by producing a larger quantity of goods and services. This cost reduction can be achieved by taking advantage of the economies of scale, which means that a larger quantity of goods and services can be produced at a lower cost than if a smaller quantity was produced.
  • Cost Leadership: Cost leadership is a business strategy where an organization sets out to be the lowest cost producer in its industry. Companies may seek to achieve cost leadership by reducing the cost of their raw materials, streamlining their production processes, and cutting back on non-essential costs.
  • Strategic Outsourcing: By outsourcing certain activities to outside suppliers, companies can take advantage of lower costs or access to specialized skills. This can give organizations a cost advantage over their competition, as they can produce their goods and services at a lower cost than their competitors.
  • Automation: Automation can be a cost advantage for organizations as it can reduce the amount of manual labor required and the associated costs. Automation can also reduce the costs associated with errors and rework, as the machines are programmed to follow a set process that is free from mistakes.

Limitations of Cost advantage

The limitations of cost advantage include:

  • High production costs: Companies may have to incur high costs for production and labor, which can erode the cost advantage.
  • Difficult to maintain: It can be difficult to maintain a cost advantage as competitors may be able to replicate or improve upon the cost-saving measures.
  • Short-term advantage: Cost advantage may be fleeting as competitors can quickly adjust their pricing in response to price cuts.
  • Low quality: Companies may choose to cut costs by using lower quality materials or labor, which can lead to lower quality products or services.
  • Unsustainable: Companies may rely on unsustainable cost-cutting practices, such as outsourcing production, that may not be sustainable in the long run.

Other approaches related to Cost advantage

  • Investing in new technologies and cost effective processes: This can help reduce costs and increase efficiency, allowing the company to offer better products and services at lower costs than competitors.
  • Utilizing economies of scale: By producing in bulk, companies are able to reduce their costs, allowing them to offer the same products and services at lower prices than competitors.
  • Negotiating better deals with suppliers: By negotiating with suppliers, companies can secure better deals and reduce the cost of inputs, which can help them keep their costs down and offer better prices than competitors.
  • Leveraging outsourcing: By outsourcing certain processes, companies can reduce their costs and be more competitive.
  • Optimizing inventory and waste management: By optimizing inventory and waste management, companies can reduce their costs and remain competitive.

In conclusion, there are several approaches organizations can take to achieve a cost advantage over their competitors. These include investing in new technologies and cost-effective processes, utilizing economies of scale, negotiating better deals with suppliers, leveraging outsourcing, and optimizing inventory and waste management. By adopting these strategies, companies can reduce their costs and offer better products and services at more competitive prices.


Cost advantage — recommended articles
Low cost strategy — Tactical outsourcing — Economies of scale — Lateral integration — Cost leadership strategy — Vertical integration — Downsizing — Vertical diversification strategy — Production concept

References

Author: Sylwia Wierciak

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