Strategic Management

Lecture 04:

Cost Leadership
Niels-Erik Wergin
 The Strategic Management Process
External
Analysis

Mission Objectives Strategic Strategy Competitive

Choice Implementation Advantage

Internal
Analysis

Business Level Corporate Level

Strategy Strategy

How to Position a Which Businesses

Business to Enter?
in the Market?

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 Business-Level Strategies

Two Generic Business Level Strategies

Cost Leadership (this week):
• generate economic value by having lower costs
than competitors
Example: Asda

Product Differentiation (next week):

• generate economic value by offering higher quality (or
more service) than competitors
Example: Waitrose
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 Understanding Cost Advantage

Managers need to understand who has

the cost advantage in their market

• it could be the focal firm

• develop a strategy to exploit the advantage

• it could be a competitor

• develop a strategy to either capture the

advantage or compete on some other basis

Strategic Management © Niels Wergin 2009

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 Sources of Cost Advantage

Economies of Scale
• average cost per unit falls as quantity increases
-until the minimum efficient scale is reached

• are a cost advantage because competitors may

not be able to match the scale because of capital
requirements (barrier to entry)

• international expansion may allow a firm to have

enough sales to justify investing in additional
capacity to capture economies of scale
Example: Computers, Cars, Clothes
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 Sources of Cost Advantage

Learning Curve Economies

• a firm gets more efficient at a process with experience

• the more complicated/technical the process,

the greater the experience advantage

• international expansion may propel a firm down the

experience curve because of higher volumes

Example: Computers

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 Sources of Cost Advantage

Policy Choices

• firms get to choose how they will serve the market

• we’ll offer level of quality that is inexpensive to
produce
• firms can make policy choices that give people
incentives to reduce cost at every opportunity

Example: Ryanair, EasJet

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 The Strategy Clock

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 Route 1: No Frills Strategy

 Low price combined with low perceived product

benefits focusing on price-sensitive market segments
• Commodity markets
• Price-sensitive customers
• High power, low switching costs among buyers
• Opportunity to avoid major competitors

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 Route 2: Low-Price Strategy

 Lower price than competitors while offering similar

product benefits
 Pitfalls
• Margin reductions
• Inability to reinvest

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 Route 3: Hybrid Strategy

 Seeks to simultaneously achieve differentiation and

low price relative to competitors
 Advantageous when
• Greater volumes can be achieved
• Cost reductions outside differentiated activities are
available
• Used as an entry strategy

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 Route 4: Differentiation Strategy

 Seeks to provide products that offer benefits that

differ from those offered by competitors
 Dependent upon
• Identifying and understanding strategic customer
needs
• Identifying key competitors’ strategies

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 Route 5: Focused Differentiation

 Seeks to provide high perceived product benefits, justifying

price premiums
 Key issues
• Choice between focus strategy and broad differentiation
• Tensions between focus strategy and other strategies
• Market changes

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 Routes 6-8: Failure Strategies

 6 – Increase prices without increasing

service/product benefits

 7 – Reduction in product/service benefits with

increase in relative price

 8 – Reduction in benefits whilst maintaining price

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 Achieving Low Prices

Operate with lower Develop a unique

margins cost structure

Create efficiency in Focus on market

organisational segments with
capabilities low expectations

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 Dangers of Low Price Strategies

 Competitors might follow suit

 Customers associate low price with low
benefits (e.g. Ryanair) or quality
 Cost reductions may result in inability to
pursue differentiation strategy

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 Summary

 The bases of competitive strategy include no frills, low-price,

differentiation, hybrid, and focused differentiation strategies
 Managers must consider the bases upon which price-based
or differentiation strategies can be sustained on strategic
capabilities
 Sustainable competitive advantage is difficult to achieve in
hypercompetitive conditions
 Strategies of collaboration may offer alternatives to or
complement competitive strategies

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Key Debate: To be Different or the Same ?

 To what extent do universities compete by

being different or the same? Car
manufacturers?
 Considering the nature of their industries and
key players within them, why might these
organisations adopt these approaches to
conformity or differentiation?

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 Case: Ryanair’s No Frills Strategy

 What are the elements of

Ryanair’s ‘no frills’
strategy?
 How easy would it be for
larger airlines such as BA
to imitate the strategy?
 On what bases could other
low-price airlines compete
with Ryanair?
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