Describe the two basic cost-reducing approaches a company can take to become a low-cost provider in its industry.
What will be an ideal response?
The two basic cost-reducing approaches a company can take to become a low-cost provider in its industry are:
1. Perform value chain activities more cost-effectively than rivals. A company may do this by:
• Capturing all available economies of scale
• Taking full advantage of experience- and learning-curve effects
• Operating facilities at full capacity
• Improving supply chain efficiency
• Substituting lower-cost inputs wherever there is little or no sacrifice in product quality or performance
• Using the company's bargaining power vis-à-vis suppliers or others in the value chain system to gain concessions
• Using online systems and sophisticated software to achieve operating efficiencies
• Improving process design and employing advanced production technology
• Being alert to the cost advantages of outsourcing or vertical integration
• Motivating employees through incentives and company culture
2. Revamp the firm's overall value chain to eliminate or bypass some cost-producing activities. A company may do this by:
• Selling direct to consumers and bypassing the activities and costs of distributors and dealers
• Streamlining operations by eliminating low value-added or unnecessary work steps and activities
• Reducing materials handling and shipping costs by having suppliers locate their plants or warehouses close to the company's own facilities
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