The impact of rising costs invariably affects every organization, and no company can completely avoid its impact. This means that managers must learn to strategize to adjust to the effect inflation has on their current operating costs. However, most companies, especially those in capital-intensive industries often fail to pay enough attention to the way increasing capital requirements affects their ability to compete in the long-run. Experts at Infiniti Research believe that a comprehensive cost analysis and an effective cost leadership strategy can help companies overcome this situation and build a strategic position for themselves in the market.
What is a cost leadership strategy?
A cost leadership strategy focuses on methods that reduce costs and help in the production of least expensive goods in the industry in an effort to gain maximum market share. The availability of a wide variety of choices in the market makes the modern business environment highly complex and sophisticated. Businesses that aim to gain an overall cost leadership in the market must have a minimal production cost and must be able to offer the same level of product quality as the competitors at a much lower price. One of the key benefits of cost leadership strategy is that it gives companies a competitive edge when compared to other businesses in the market.
Building an ideal cost leadership strategy
Diagnose changing cost economics
Inflation affects each company in an industry differently. This is why companies must always keep a close watch on the changing cost economics to build a better low cost leadership strategy. This ranges from the raw materials stage to the final price paid by the final consumer. This requires the construction of a value chain that depicts the value-added at each step in the entire market process and identifies the shifting cost components. Managers must also make it a point to assess the long-run shifts in the cost position of the company’s competitors in relation to theirs. Factoring out the implication of future inflation into costs is also important. This type of analysis helps companies to effectively strategize for a low cost leadership strategy.
Assess competitive shifts
Another strategy to build a cost leadership strategy is to assess how rising cost pressures will affect the growth objectives and market share potential of the company. Consider the case where all competitors feel the same inflationary impact on operating costs but the fixed asset-capacity cost increases that they suffer from are different from one another. In this case, it is advisable to use an “invest and grow” strategy to build market share and help the company gain a competitive advantage, provided it invests early in new capacity. This would consequently help the business enjoy lower fixed costs than competitors that add capacity later, when investment costs are higher.
Choosing the right differentiation strategy
If a company relies solely on a differentiation strategy to win market share, there are chances that the rising capital costs will hit your company hard. There are limits to the excess amount paid by buyers for a product that is fancier than its rivals. At some point, the buyers may be attracted to a more generic product at a lower price. To avoid this and successfully implement a low cost leadership strategy, businesses must ensure new spending commitments that are affected by rising capital costs. Businesses must try to shift the basis of their differentiation to operating cost variables which includes advertising, service, inspection procedures, and manufacturing workmanship.