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Top 3 Tips To Develop An Effective Cost Leadership Strategy

Written By

Sraban Mukherjee

PhD, Director of ITS Engineering College

Briefly Speaking

Find out the steps your company needs to take to gain a competitive advantage via cost leadership strategy.
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In simple terms, cost leadership means the lowest cost of operation in the industry segment. For example, if you are large steel manufacturer operating globally, then the cost of production of your steel product should be the lowest amongst all major steel manufacturers in the same product range or mix.  Similarly, if you are in the logistic business , then your cost of operation should be the lowest amongst all other competitors with the same delivery parameters in the same line of business.

Cost leadership is one business strategy that organisations must use to establish a competitive advantage. When the revenue growth is not significant or when profits are under strain due to competitive pressure in the market, the organisation should adopt a cost leadership strategy to have low cost structure and management. Sometimes, the organisation takes advantage of their cost leadership by entering emerging markets of developing or under developing markets to create a new market for their products.

The question is , therefore, why every organisation does not take cost leadership seriously as an important strategy and what organisations can do to exercise cost leadership. The answer to the first question relies purely on the business strategy of the organisation — whether the organisations wants to have a competitive advantage on product or technology or economy of scales, etc.  To practice cost leadership in an organization – whether large or small or medium sized – business owners can take the following various proactive steps:

  • Identify all cost components of each process of your business. To do that, identify major processes and sub-processes of your business. Take a simple example of packing and dispatching, which includes all the costs of packing, commercial processing, logistics, warehousing etc. or procurement of material, which includes indent preparation to pay suppliers. Top management or business owners can identify the process owner of each key processes and assign responsibility to reduce cost by  x% by y months. The leadership team or business owner then monitors the efforts vigorously.
     
  • Instead of the ritual, traditional budgeting process, introduce a zero based budgeting system and bench mark each operation with best-in-class and best-in-industry norms.
     
  • Evaluate value adding and non-value adding components in each business process and explore how the non-value adding components can be either eliminated or combined with other processes, automated, or outsourced. It is essential to remember that some of the key business processes, which involve the domain expertise of the business or a source of competitive advantage, are not to be outsourced or eliminated.

Some organisations try to achieve cost leadership in economic downturn by reducing headcount. This is very much counter-productive. The important cost issue is not head count but employee cost. Hence, identify positions which are not value adding and work on that area rather than losing key resources which are at operating levels or talents at the bottom of the pyramid.  Second, do not by any means reduce or cut your marketing and selling cost or R & D cost which gives long term competitive advantage.

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