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Cost leadership strategy

Cost Leadership Strategies that Every Forward-Thinking Organization Must Consider

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.

Avoiding pricing traps requires a strategic view of the current cost structure, how the structure changes, and the implications for gaining a sustainable competitive advantage. Request a free proposal to know how our experts can help you achieve this.

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.

Managers must think strategically about the long-run implications of short-run cost increases and rightly identify ways to capture a competitive advantage. Get in touch with our experts for more insights on how to accomplish this.

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.

Learn more about how Infiniti’s solutions can help your business build a better cost leadership strategy.

total quality management

How can Benchmarking Help Improve Cost Competitiveness in the Steel Market?

Steel is one of the top products in the manufacturing sector, and the market is getting intensely competitive with each passing day. Over the past couple of years, the global steel industry has been booming due to liberalization policies and increased infrastructural works. The fierce competition in the steel market can be undermined by the rise of Asian countries, such as India, ending the dominance of the USA. One of the biggest challenges faced in the steel market is to contain costs and increase the efficiency of their assets. Although individual players are well aware of their production assets, there is very little transparency about the cost-saving capabilities across the industry. As a result, cost benchmarking becomes a major challenge for players in the steel market. Instead of IR_Brochurefocusing on resource utilization alone, working with multiple operating points can yield a better result to overcome cost challenges.

Importance of overcoming the cost challenge

The demand in the steel market is primarily driven by the increasing the use of metal packaging materials, which is increasing at a faster rate compared to the GDP growth in the emerging markets. However, the use of steel as a packaging material is facing some stiff competition from alternatives such as aluminum, plastics, and composite materials. As a result, companies in the steel market are fighting hard to gain attractive volumes in the international steel market to tackle cost competitiveness. The global steel prices are mainly determined by two significant factors namely, overcapacity in China and low transportation costs globally. For instance, importing steel from other countries wasn’t considered to be economically viable, but low-cost global transportation has made it possible to source rebars from Turkey and hot-rolled coil (HRC) from South Korea. Additionally, for a few years in a row now, players in the steel market are facing overcapacity issues with utilization rates lingering at a low 70%, which is far from the healthy threshold of 80%.

How can benchmarking help overcome cost competitiveness in the steel market?

Steel manufacturers in the recent past have looked on to numerous large-scale programs to bring operational transformation and cost reduction in the steel market. They have resorted to benchmarks, including lean manufacturing and six sigma to eliminate waste, minimize production errors, and increase end-value for the customers. Steel manufacturers have shifted their focus to these areas to overcome cost competitiveness:

  • Companies in the steel market can improve their energy and material efficiency by looking at numerous methods including reducing yield loss in steelmaking, reducing the consumption of energy and consumables, and reducing the fuel rate of the blast furnace.
  • Manufacturers can look for ways to reduce wastage by implementing strict rules for input raw material, which will minimize the amount of rework and scrapped material.
  • Investing in automation and increasing the skill set of operators will directly improve labor productivity and optimize the
  • Increasing efficiency in maintenance, for instance, the wrench time of the maintenance workforce can be improved through the better planning and scheduling of maintenance tasks
  • Following a shared-services approach for group functions can help streamline sales and general administrative
  • By examining the total cost of ownership of various alternatives, players in the steel market can reduce their external spend when purchasing materials and services.

To know more about how benchmarking can help overcome cost competitiveness in the steel market:

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