COST LEADERSHIP STRATEGIES

Accelerate your business with these expert tips on "Cost Leadership Strategies". Analyse and discover this TIP!

This is one of the generic strategies you can follow in your new venture. The idea is that the customer segment (+) they choose you over the competition because you are the cheapest. It is not enough to be the cheapest, you have to be the cost leader. This type of strategy forces you to design your business model in a low-cost way, i.e. by cutting back on key activities and resources so that low sales prices do not leave you with no profit margin.

It is not coherent to think that you can deploy customised and expensive activities to provide a service that you charge a low price for. You have to choose. Being between two waters, i.e. I am not clear about my strategy, is very dangerous and leads to customers who are looking for a cheap service seeing you as expensive and those who are looking for a service not seeing you as different. When it is difficult to differentiate in the product, this can be a good option. Example: If you sell salt or gasoline, it is difficult for the customer to differentiate that our product is better; by smell? taste?

A cost-leading strategy focuses on producing and selling products or services at lower prices than the competition by reducing costs in all possible areas of the business. This involves having a very efficient cost structure, eliminating unnecessary costs in areas such as marketing, advertising and distribution, among others.

Here are some tips for implementing a cost-leading strategy in a start-up company

1. Identify the most important costs: identify the most relevant costs of the business and try to minimise them as much as possible.
2. Focus on operational efficiency: seek ways to optimise operational processes in order to reduce costs.
3. Harnessing technology: use modern and efficient technologies to automate processes and reduce costs.
4. Negotiate with suppliers: always seek the best price with suppliers to minimise production costs.
5. Reduce marketing and advertising: look for more effective and economical ways to advertise products or services, rather than using costly and ineffective methods.
6. Control fixed costs: fixed costs are those costs that do not vary according to the level of production or sales. It is important to keep these costs under control in order to maintain an efficient cost structure.
7. Adjust prices: offer products or services at lower prices than those of competitors, while ensuring that an adequate profit margin is maintained.

The low-cost strategy

Low-cost strategy is a marketing technique that focuses on offering products or services at a very competitive price, in order to capture an important part of the market that values price more than other factors, such as quality or service. The aim is to keep production and operating costs as low as possible, to be able to offer more attractive prices than the competition and, at the same time, to generate profits. Companies using the low-cost strategy typically focus on process optimisation and efficiency in production, distribution and customer service. They may also offer products or services with fewer features, but which meet consumers' basic needs at a lower price.

In general, the low-cost strategy can be effective for companies that have a leading market position, a loyal customer base or a strong competitive cost advantage, and are seeking to expand their presence or increase their market share. However, it can also be a risky strategy, as it may limit the company's ability to invest in quality improvement or innovation, and may also attract competitors seeking to capture a share of the low-cost market. In short, thehe low-cost strategy can be an attractive option for companies looking to grow in the market and improve their profitability, as long as it is implemented in a smart and sustainable way.

CONFIRMED: THERE IS LIFE BEYOND COST REDUCTION!

It is becoming sadly common to hear in the media that a certain company has laid off half of its workforce, and after a few months, it turns out that it has to close its doors due to the unsustainability of the situation. Of course, there is a purely financial component (and no small one) in this type of news, as it is increasingly difficult to obtain financing, especially if it is a small or medium-sized company... but it is not the only thing. There is life beyond cost reduction! There are many entrepreneurs who are worried that they will not be able to pay their salaries the following month, and they tell me that they have tried all the traditional approaches to revive their business, which have seemed to work for a few months, but even so, their profitability continues to fall and they will have to close down if they continue in this way. This unfortunately common scenario is the consequence of a misconception, at least from my point of view: only the cost structure can be worked on to improve the competitive position. The profitability of a company is input/output or, in other words, the ability to generate business divided by the weight of the cost structure.

"If you only focus on one factor, costs, you can extend the agony for a few more months... but in the end what really matters is to increase the turnover, the sales".

As we have already mentioned, in this type of situation the traditional approach is to work on the denominator of the equation, i.e. on costs, as the traditional canons of strategy dictate (the most common slogan is "We are going to make your company more competitive"). If we do the analysis from the business model, we would typically talk about focusing on the left side, which is inside the barriers of our company... valuing everything that lies beyond as a big unknown (the market), a black box on which we cannot act (surely?).

THE USUAL COST-CUTTING STRATEGIES

SOME OF THE ACTIVITIES THAT ARE TRADITIONALLY ADDRESSED TO IMPROVE THE COMPANY'S FAMED COMPETITIVENESS ARE:

• We optimise our processes by eliminating any activity that does not generate value for the customer... but without ever asking the customer. We have become accustomed to "playing it by ear", deciding what the customer wants and doesn't want by resorting to our corporate magic balls, implemented in Excel... which is an aberration. Sometimes, eliminating a small part of a service can have a major impact on demand... so we must "pull" service design, evaluate it as a whole and make decisions involving the customer.
• We evaluate our cost structure design, making cuts in any items that are not purely essential to the production process. One of the first mistakes we tend to make, spurred on by the short term, is to get rid of the areas that operate in the long term in our companies, and whose work does not usually affect very directly the future of this year's income statement: marketing, R&D, training... etc. What lovers of Porter's chain call support activities.
• We make adjustments to the direct staff structure, resizing the workforce to the current implementation needs. There are no objections here, except two small caveats: first, we must take exquisite care to eliminate fat and not muscle... something that traditional restructuring policies do not take into account, which are focused on eliminating meat. Second, it is critical to think at least in the medium term, and to assess whether we have the capacity to retain the most valuable elements of the workforce and use them to improve our competitive capacity: create or optimise a product, design a new service... etc. In other words, prepare the conditions for future success.

A REAL EXAMPLE:

"In a technology company, faced with a sharp fall in market demand, the decision was taken to carry out a redundancy programme... and the criteria for choosing which members of staff to lay off was a list that related two variables: the 20 people with the highest salaries in the company crossed with the cost of redundancy. The result? A company that has produced stellar EBIDTA numbers for 2010, but whose competitive capacity has been seriously damaged... and which is in fact beginning to feel the effects of the knowledge decapitalisation it is suffering".

• Halfway between the two previous points is one of the real cost nuclei that we rarely address with the necessary forcefulness: indirect costs. That legion of consultants, managers and middle managers, business developers, channel managers... and so on. Their role is absolutely critical... but only if they really add value. And in my experience, due to the complexity of "getting to grips" with this item, it is usually left as it is, without dispassionately assessing its sense in the short and medium term. As someone I respect very much says: what is the point of having x resources "scratching" on a market that has "nothing to scratch"?
• We make an analysis of which business lines, products or services are profitable... but based on what?... on the volume they represent in terms of turnover? On their gross profitability? It is undoubtedly important to take the decision to eliminate unprofitable products or services, but not only thinking about this year's operating account, because we would only keep the star products and cash cow... leaving aside the unknown products, which are what can really be the stars of the future. In any case, the best factor on which to compare "pears with pears" when evaluating our portfolio of products or services is the contribution margin.
• In this spirit of getting rid of the less profitable aspects of our business model, we tend to forget about our clients (yes, I said GETTING RID OF CLIENTS). Not all clients are appropriate for our business... either because of their high rate of default, or because they force us to reinvent the wheel every time, or because their projects are constantly unprofitable (if we work for services)... but be careful! Client profitability is measured over the long term, not just per project or order. It is therefore essential to study the value of the client and to make the necessary decisions in this structural cost analysis.
• Although it occurs to everyone that offshoring production to a location that is cheaper for production (either in terms of labour or raw material costs), the reality is that an offshoring process is expensive and damages profitability in the short term, in addition to a series of conditioning factors that we must evaluate VERY carefully (quality losses, agility of the production process, intellectual property). Internationalisation processes are undoubtedly capable of producing significant increases in profitability... but they must be carefully designed and their effects will be revealed in the medium to long term.

This is typically the 'traditional' strategy world's approach to optimising competitive position, which is not in itself bad... and typically encompasses 95% of the projects undertaken in this area. But...

"WHAT HAPPENS ONCE WE HAVE TAKEN THESE MEASURES AND THE COMPETITIVE SITUATION DOES NOT IMPROVE, DO WE HAVE TO CLOSE DOWN?

I have always been struck by the lack of imagination when it comes to working on this type of approach, absolutely deterministic and 'textbook'... I think you have to put a number of different variables into the mixer from the cost side, such as unbundling or decoupling the business model, enhancing scalability, incorporating business models from various sides, designing structures capable of pivoting your business model with ease. In this scenario, it is necessary not only to work on the reduction part of competitiveness improvement, which usually only works well in the short term, but does not tackle the really serious problem: the organic and stable fall in demand. In the second part of the article you can see what are the main strategies to increase demand and therefore answer the question 'How do I sell more' (or really, how to sell more and more profitably).