Cost advantage

Cost advantage
See also
Skimming pricing strategy Conglomerate diversification Vertical integration Related diversification Cost leadership strategy Competitive advantage Horizontal diversification strategy Preventive pricing strategy Product strategy

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.

References

• Christmann, P. (2000). Effects of “best practices” of environmental management on cost advantage: The role of complementary assets. Academy of Management journal, 43(4), 663-680.
• Besanko, D., Dranove, D., & Shanley, M. (2001). Exploiting a cost advantage and coping with a cost disadvantage. Management Science, 47(2), 221-235.
• Michael E. Porter, Victor E. Millar (1985) How Information Gives You Competitive Advantage. Harvard Business Review.

Author: Sylwia Wierciak