Name and describe the three different types of cost advantage a business can achieve to attain a competitive advantage. Be sure to explain how each type results in a competitive advantage

Question

What will be an ideal response?

Answer 1

The three types of cost advantage are:
(1 ) Variable Cost Advantage — Businesses with a lower unit cost are able to achieve the same (or better) unit margin at lower prices than competing businesses. Volume is a key factor in achieving a low variable cost advantage. As volume increases, the cost per unit generally decreases. A larger production volume allows for production and purchasing economies that lower the unit cost of a product, thereby creating a scale effect. Likewise, as a business adds products to its product line that have similar purchased materials and manufacturing processes, it is able to lower the average unit cost of all products, producing a scope effect. Finally, as a business builds more of the same product, there is a greater opportunity for learning effects. These non-scale, non-scope effects contribute to lower costs through process improvements that are the result of learning.
(2 ) Marketing Cost Advantage — Can be derived from product line extensions. It takes a certain number of salespeople to adequately cover a target market. As the sales force is given more products to sell to the same customers, a marketing cost scope effect is created. Another area of marketing cost advantage is derived from the advertising cost efficiency of a brand extension strategy.
(3 ) Operating Cost Advantage — Although an operating cost advantage is generally outside the control or influence of the marketing function, lower operating expenses relative to competitors contribute to a cost advantage.