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Transcript of B2B Mktg - Session 05c - Cost Leadership Students' Copy)
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B2B MarketingSri Balaji Society 2010-12 (Sem I)
Session 05c
Cost Leadership
Girish Ketkar Session 05cB2B Marketing
Sri Balaji Society 2010-12 (Sem I)
Agenda
Cost leadership
– Aim
– Key factors
Steps in cost leadership strategy
Case studies
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Girish Ketkar Session 05cB2B Marketing
Sri Balaji Society 2010-12 (Sem I)
Reading
Competitive Advantage (Michael E. Porter)
– Chapter 3: Cost Advantage
Girish Ketkar Session 05cB2B Marketing
Sri Balaji Society 2010-12 (Sem I)
Cost Leadership
Aim
– To become the low-cost producer in its industry
Key factors
– Exploit all sources of cost advantage
– Ensure parity or proximity in the bases of differentiation
– Achieve and sustain overall cost leadership
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Girish Ketkar Session 05cB2B Marketing
Sri Balaji Society 2010-12 (Sem I)
Cost Leadership
Girish Ketkar Session 05cB2B Marketing
Sri Balaji Society 2010-12 (Sem I)
Cost Leadership Strategy
Steps
– Define the value chain
– Assign costs and assets to value activities
– Study cost drivers
– Understand cost dynamics
– Identify sources of cost differences vis-à-vis competitors
– Build strategy to control cost drivers
– Reconfigure the value chain
– Test for sustainability
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Girish Ketkar Session 05cB2B Marketing
Sri Balaji Society 2010-12 (Sem I)
Defining the Value Chain
Disaggregate each generic category of value chain into value activities, depending on
– Size and growth of cost represented by the activity
– Cost behavior of the activity
– Competitor differences in performing the activity
Girish Ketkar Session 05cB2B Marketing
Sri Balaji Society 2010-12 (Sem I)
Assignment of Costs and Assets
Assign costs to activities in which they are incurred
Assign assets to activities that employ, control or most influence their use
Accounting figures may need to be recast
Estimates are fine; Precision is not essential
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Girish Ketkar Session 05cB2B Marketing
Sri Balaji Society 2010-12 (Sem I)
Cost Drivers
Factors that affect costs
– Economies (or diseconomies) of scale
– Learning and spillovers
– Pattern of capacity utilization
• Important when fixed costs are high
– Linkages
• Linkages within the value chain
• Vertical linkages
– Interrelationships with other business units
Girish Ketkar Session 05cB2B Marketing
Sri Balaji Society 2010-12 (Sem I)
Cost Drivers (contd.)
Factors that affect costs
– Integration (and de-integration)
– Timing
• First mover advantage
• Timing vis-à-vis business cycle or market conditions
– Discretionary policies
– Location
– Institutional factors
• Regulations, Laws, Taxes & levies, Unionization…
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Girish Ketkar Session 05cB2B Marketing
Sri Balaji Society 2010-12 (Sem I)
Cost Dynamics
Cost behavior of activities changes over time
Factors beyond firm’s control have impact on cost behavior
Girish Ketkar Session 05cB2B Marketing
Sri Balaji Society 2010-12 (Sem I)
Cost Dynamics
Some factors that cause cost dynamics
– Industry real growth
– Differential scale sensitivity
– Different learning rates
– Differential technological change
– Relative inflation of costs
– Aging
– Market adjustment
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Girish Ketkar Session 05cB2B Marketing
Sri Balaji Society 2010-12 (Sem I)
Controlling the Cost Drivers
Prioritize activities
– Some offer more potential for gaining cost advantage than others
Ascertain cost drivers that impact the high potential activities
Build strategies to control the cost drivers
Girish Ketkar Session 05cB2B Marketing
Sri Balaji Society 2010-12 (Sem I)
Controlling the Cost Drivers (example)
Capacity Utilization
– Different pricing policies for peak and lean periods
– More advertising during lean periods
– Alternative uses of idle capacity
– Build optimum (not maximum) capacity; Borrow capacity during peak periods
– Convert “fixed” capacity to “variable” capacity
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Girish Ketkar Session 05cB2B Marketing
Sri Balaji Society 2010-12 (Sem I)
Redefining the Value Chain
Adopting substantially different value chain (value activities) than competitors
Examples:
– Significantly different automation levels
– Different (or new) raw materials
– E-mail campaigns instead of event sponsorships
– Radically different manufacturing process
– e-learning instead of classroom training for employees
Girish Ketkar Session 05cB2B Marketing
Sri Balaji Society 2010-12 (Sem I)
Ensuring Success in Cost Leadership
Relentless pursuit
Adequate top management attention
Firmwide communication and involvement
Training, motivation
Cross-departmental coordination
Regular measurement
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Girish Ketkar Session 05cB2B Marketing
Sri Balaji Society 2010-12 (Sem I)
Avoiding Pitfalls
Study all costs, not just manufacturing costs
Give due importance to “procurement”
Cost of purchased items can be substantial
Manage and exploit linkages; Evaluate trade-offs between activities
Think different, not incremental
Do not sacrifice differentiation
Girish Ketkar Session 05cB2B Marketing
Sri Balaji Society 2010-12 (Sem I)
Exercise: Case Study – Nucor Corporation
How does this case illustrate some of the points discussed in previous slides?
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Girish Ketkar Session 05cB2B Marketing
Sri Balaji Society 2010-12 (Sem I)
Exercise: Case Study – Walmart
What activities of value chain has Walmart leveraged to attain cost leadership?
Note: Formerly branded as Wal-Mart, the company was rebranded as Walmart in 2008.
Girish Ketkar Session 05cB2B Marketing
Sri Balaji Society 2010-12 (Sem I)
Exercise: Case Study – Emerson
What activities of value chain did Emerson leverage to attain cost leadership?
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Girish Ketkar Session 05cB2B Marketing
Sri Balaji Society 2010-12 (Sem I)
Additional Reading
“How Emerson Rebounded from a Bad Loss”
– An excerpt from the book
• “Performance Without Compromise”
– by Charles F. Knight (former CEO of Emerson) with Davis Dyer
Girish Ketkar Session 05cB2B Marketing
Sri Balaji Society 2010-12 (Sem I)
What We Covered Today
Cost Leadership
– Assignments of costs and assets
– Cost drivers, Cost dynamics, Controlling the cost drivers
– Redefining the value chain
– Ensuring success and avoiding pitfalls
– Case studies
• Nucor
• Walmart
• Emerson