Dear
Readers, Welcome back!
This time I present you some examples on cost leadership. How companies by deploying some cost saving/reduction became giant leaders.
First of all we begin with what exactly is cost leadership?
The two
words are pretty much self-explanatory. One
may describe it as a way to establish the competitive advantage. Cost leadership, in basic words, means
the lowest cost of operation in
the industry. A cost leadership strategy aims to exploit scale of production, well defined
scope and other economies (e.g. a good purchasing approach), producing highly standardized
products, using high technology. The cost leadership is often driven by company efficiency, size, scale,
scope and cumulative experience (learning curve). It
involves marketing your company as the cheapest source for a good or service.
This means that you need to minimize your costs and pass the savings on to your
customers.
Some of the well known examples of cost leaders around the world are :
- Wal-Mart
- McDonald's
- Ikea
- Southwest Airlines
Wal-Mart
Wal-Mart
Stores Inc. has been successful using its strategy of everyday low
prices to attract customers. The idea of everyday low prices is to
offer products at a cheaper rate than competitors on a consistent basis, rather
than relying on sales. Wal-Mart is able to achieve this due to its large scale
and efficient supply chain. They source products from cheap
domestic suppliers and from low-wage foreign markets. This allows the company
to sell their items at low prices and to profit off thin margins at a high
volume.
McDonald's
The
restaurant industry is known for yielding low margins that can make it
difficult to compete with a cost leadership marketing
strategy. McDonald's has been extremely successful with this strategy by
offering basic fast-food meals at low prices. They are able to keep prices low
through a division of labor that allows it to hire and train inexperienced
employees rather than trained cooks. It also relies on few managers who
typically earn higher wages. These staff savings allow the company to offer its
foods for bargain prices.
Ikea
The
Swedish furniture retailer Ikea revolutionized the furniture industry by
offering cheap but stylish furniture. Ikea is able to keep its prices low
by sourcing its products in low-wage countries and by offering
a very basic level of service. Ikea does not assemble or deliver furniture;
customers must collect the furniture in the warehouse and assemble at home
themselves. While this is less convenient than traditional retailers, it allows
Ikea to offer lower prices that attract customers.
Southwest Airlines
The airline industry has typically been an industry where profits are hard to come by without charging high ticket prices. Southwest Airlines challenged this concept by marketing itself as a cost leader. Southwest attempts to offer the lowest prices possible by being more efficient than traditional airlines. They minimize the time that their planes spend on the tarmac in order to keep them flying and to keep profits up. They also offer little in the way of additional thrills to customers, but pass the cost savings on to them.
Now stating an example from the emerging markets. One which manufactures in
emerging markets as well as sells in them. And it is cost effective!
Micromax
Micromax
The
history of Micromax (2011-12 revenue: Rs 1,978 crore), which ventured into the
mobile phone market in 2008, is one of the most fascinating success stories in
the Indian consumer electronics industry. In barely five years, the company has
come to occupy the third position (by volume) in the mobile handset market in
India and is at No. 12 globally. It leads the Indian tablet market with a share
of 18.4 per cent, ahead of veterans Samsung and Apple. The
Gurgaon-headquartered company owes its success not just to the ticket it puts
on its products or the speed with which it puts new designs on the shelves but
to how it has managed these two crucial product inputs by leveraging China. To
be more specific, the labour cost advantage and the production flexibility that
China offered.
The stumper: the strategy that offered Micromax its biggest advantage in its first five years is under threat and it will require a re-examination by the company — and a number of other multinationals with Chinese production — of their overall supply-chain strategies.
The stumper: the strategy that offered Micromax its biggest advantage in its first five years is under threat and it will require a re-examination by the company — and a number of other multinationals with Chinese production — of their overall supply-chain strategies.
The reason
is simple. At Shenzhen, where some of China’s largest electronics manufacturers
are located, the minimum wage is set for a 13.3 per cent hike from this year —
a move that could have a ripple effect across the world’s major technology
companies. According to some estimates, between 2005 and 2010, basic
manufacturing wages in the country have soared roughly 70 per cent.
“Eventually, Indian companies sourcing products and components from China need
to develop local infrastructure.
The Strategist, Rahul Sharma, co-founder, Micromax, had said: “The strategy is simple: create high volumes, reach the customer base through effective distribution, give them products that are innovative and cost-effective. What has also set Micromax apart is the speed at which it has been able to put products in the market and its tremendous reach. Where Micromax takes barely a month or two to launch products, another big international brand requires roughly 18 months for a similar product to go through the retail pipeline. Its recent entry into categories like tablets and LED TVs has made Micromax’s life a little more complicated.
In effect, Micromax’s growth strategy has followed three clear stages, explains an industry insider.
The Strategist, Rahul Sharma, co-founder, Micromax, had said: “The strategy is simple: create high volumes, reach the customer base through effective distribution, give them products that are innovative and cost-effective. What has also set Micromax apart is the speed at which it has been able to put products in the market and its tremendous reach. Where Micromax takes barely a month or two to launch products, another big international brand requires roughly 18 months for a similar product to go through the retail pipeline. Its recent entry into categories like tablets and LED TVs has made Micromax’s life a little more complicated.
In effect, Micromax’s growth strategy has followed three clear stages, explains an industry insider.
- When it started out, the company picked handsets from China, rebadged them and sold them in the India market.
- In the second stage, it realised the need to do extensive research in terms of Indian consumers’ demands and product development.
- Now it has crossed over into a new phase, where the company has started following a mix-and-match strategy — getting some products manufactured in China and other countries, sourcing components from abroad and manufacturing some of the newer lines in India.
Pick up a box (of a mobile handset from any company) and you will see most are produced in China. The country clearly has built economies of scale and knows how to play it right. Why just us, manufacturing across categories is done in China, thanks to the cost efficiencies, eco-system and how they come together.
Micromax orders 5,00,000 handsets at the entry level from their contract manufacturers in China at one go. The volume growth in turn ensures better cost efficiencies.
Micromax’s focus these days on is building its manufacturing infrastructure in India. It is a consumer durables company diversifying into other categories. Micromax’s facility in Himachal Pradesh already manufactures television sets and some tablet models.
The reason is obvious: China is losing the advantage of labor cost arbitrage, a reason why even companies like Apple and GE have decided to shift product lines from China. “Because Chinese wages are rising rapidly,” says an analyst, “it makes sense to return manufacturing of a wide range of goods, with moderate levels of labor content and high logistics costs, to India.” Re-shoring may also make particular sense for bulky goods, like television sets, which naturally incur higher transportation costs. Other variables include greater supply chain complexity, longer cycle times, quality issues and responsiveness to local demand. A local supply chain makes it easier for a company with a wide portfolio to respond to any sudden supply chain disruption or other unpredictable event.
So companies may achieve cost effectiveness by leveraging the strategies these companies have followed. They need to focus primarily on reducing the overall supply chain costs.
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