1. Lecture 04: Cost Leadership Niels-Erik Wergin
BUSI Strategic Management (2009)International HRM ( )
14/04/2017
Strategic Management
Lecture 04: Cost Leadership Niels-Erik Wergin
© Niels Wergin 2009© Niels-Erik Wergin 2009

2. BUSI1317 - Strategic Management (2009)International HRM (2009-2010)
14/04/2017
The Strategic Management Process
External
Analysis
Strategic
Choice
Strategy
Implementation
Competitive
Advantage
Mission
Objectives
Internal
Analysis
Business Level
Strategy
Corporate Level
Strategy
How to Position a
Business
in the Market?
Which Businesses
to Enter?
Strategic Management © Niels Wergin 2009
© Niels Wergin 2009© Niels-Erik Wergin 2009

3. BUSI1317 - Strategic Management (2009)International HRM (2009-2010)
14/04/2017
Business-Level Strategies
Two Generic Business Level Strategies
Cost Leadership (this week):
• generate economic value by having lower costs
than competitors
Example: Asda
Product Differentiation (next week):
• generate economic value by offering higher quality (or more service) than competitors
Example: Waitrose
Strategic Management © Niels Wergin 2009
© Niels Wergin 2009© Niels-Erik Wergin 2009

4. BUSI1317 - Strategic Management (2009)International HRM (2009-2010)
14/04/2017
Understanding Cost Advantage
Managers need to understand who has
the cost advantage in their market
• it could be the focal firm
• develop a strategy to exploit the advantage
• it could be a competitor
• develop a strategy to either capture the
advantage or compete on some other basis
Strategic Management © Niels Wergin 2009
© Niels Wergin 2009© Niels-Erik Wergin 2009

5. BUSI1317 - Strategic Management (2009)International HRM (2009-2010)
14/04/2017
Sources of Cost Advantage
Economies of Scale
• average cost per unit falls as quantity increases
-until the minimum efficient scale is reached
• are a cost advantage because competitors may
not be able to match the scale because of capital
requirements (barrier to entry)
• international expansion may allow a firm to have
enough sales to justify investing in additional
capacity to capture economies of scale
Example: Computers, Cars, Clothes
Strategic Management © Niels Wergin 2009
© Niels Wergin 2009© Niels-Erik Wergin 2009

6. BUSI1317 - Strategic Management (2009)International HRM (2009-2010)
14/04/2017
Sources of Cost Advantage
Learning Curve Economies
• a firm gets more efficient at a process with experience
• the more complicated/technical the process,
the greater the experience advantage
• international expansion may propel a firm down the
experience curve because of higher volumes
Example: Computers
Strategic Management © Niels Wergin 2009
© Niels Wergin 2009© Niels-Erik Wergin 2009

7. BUSI1317 - Strategic Management (2009)International HRM (2009-2010)
14/04/2017
Sources of Cost Advantage
Policy Choices
• firms get to choose how they will serve the market
• we’ll offer level of quality that is inexpensive to
produce
• firms can make policy choices that give people
incentives to reduce cost at every opportunity
e.g. – luggage at Ryanair
Example: Ryanair, EasJet
Strategic Management © Niels Wergin 2009
© Niels Wergin 2009© Niels-Erik Wergin 2009

8. BUSI1317 - Strategic Management (2009)International HRM (2009-2010)
The Strategy Clock
14/04/2017
Strategic Management © Niels Wergin 2009
© Niels Wergin 2009© Niels-Erik Wergin 2009

9. Route 1: No Frills Strategy
BUSI Strategic Management (2009)International HRM ( )
Route 1: No Frills Strategy
14/04/2017
Low price combined with low perceived product benefits focusing on price-sensitive market segments
Commodity markets
Price-sensitive customers
High power, low switching costs among buyers
Opportunity to avoid major competitors
Strategic Management © Niels Wergin 2009
© Niels Wergin 2009© Niels-Erik Wergin 2009

10. Route 2: Low-Price Strategy
BUSI Strategic Management (2009)International HRM ( )
Route 2: Low-Price Strategy
14/04/2017
Lower price than competitors while offering similar product benefits
Pitfalls
Margin reductions
Inability to reinvest
Strategic Management © Niels Wergin 2009
© Niels Wergin 2009© Niels-Erik Wergin 2009

11. Route 3: Hybrid Strategy
BUSI Strategic Management (2009)International HRM ( )
Route 3: Hybrid Strategy
14/04/2017
Seeks to simultaneously achieve differentiation and low price relative to competitors
Advantageous when
Greater volumes can be achieved
Cost reductions outside differentiated activities are available
Used as an entry strategy
Strategic Management © Niels Wergin 2009
© Niels Wergin 2009© Niels-Erik Wergin 2009

12. Route 4: Differentiation Strategy
BUSI Strategic Management (2009)International HRM ( )
Route 4: Differentiation Strategy
14/04/2017
Seeks to provide products that offer benefits that differ from those offered by competitors
Dependent upon
Identifying and understanding strategic customer needs
Identifying key competitors’ strategies
Strategic Management © Niels Wergin 2009
© Niels Wergin 2009© Niels-Erik Wergin 2009

13. Route 5: Focused Differentiation
BUSI Strategic Management (2009)International HRM ( )
Route 5: Focused Differentiation
14/04/2017
Seeks to provide high perceived product benefits, justifying price premiums
Key issues
Choice between focus strategy and broad differentiation
Tensions between focus strategy and other strategies
Market changes
Strategic Management © Niels Wergin 2009
© Niels Wergin 2009© Niels-Erik Wergin 2009

14. Routes 6-8: Failure Strategies
BUSI Strategic Management (2009)International HRM ( )
Routes 6-8: Failure Strategies
14/04/2017
6 – Increase prices without increasing service/product benefits
7 – Reduction in product/service benefits with increase in relative price
8 – Reduction in benefits whilst maintaining price
Strategic Management © Niels Wergin 2009
© Niels Wergin 2009© Niels-Erik Wergin 2009

15. BUSI1317 - Strategic Management (2009)International HRM (2009-2010)
Achieving Low Prices
14/04/2017
Operate with lower
margins
Develop a unique
cost structure
Create efficiency in
organisational
capabilities
Focus on market
segments with
low expectations
Use easyJet clip, start with 9:35 through 9:52 on lower cost structure
Strategic Management © Niels Wergin 2009
© Niels Wergin 2009© Niels-Erik Wergin 2009

16. Dangers of Low Price Strategies
BUSI Strategic Management (2009)International HRM ( )
Dangers of Low Price Strategies
14/04/2017
Competitors might follow suit
Customers associate low price with low benefits (e.g. Ryanair) or quality
Cost reductions may result in inability to pursue differentiation strategy
Strategic Management © Niels Wergin 2009
© Niels Wergin 2009© Niels-Erik Wergin 2009

17. BUSI1317 - Strategic Management (2009)International HRM (2009-2010)
Summary
14/04/2017
The bases of competitive strategy include no frills, low-price, differentiation, hybrid, and focused differentiation strategies
Managers must consider the bases upon which price-based or differentiation strategies can be sustained on strategic capabilities
Sustainable competitive advantage is difficult to achieve in hypercompetitive conditions
Strategies of collaboration may offer alternatives to or complement competitive strategies
Strategic Management © Niels Wergin 2009
© Niels Wergin 2009© Niels-Erik Wergin 2009

18. Key Debate: To be Different or the Same ?
BUSI Strategic Management (2009)International HRM ( )
Key Debate: To be Different or the Same ?
14/04/2017
To what extent do universities compete by being different or the same? Car manufacturers?
Considering the nature of their industries and key players within them, why might these organisations adopt these approaches to conformity or differentiation?
Strategic Management © Niels Wergin 2009
© Niels Wergin 2009© Niels-Erik Wergin 2009

19. Case: Ryanair’s No Frills Strategy
BUSI Strategic Management (2009)International HRM ( )
Case: Ryanair’s No Frills Strategy
14/04/2017
What are the elements of Ryanair’s ‘no frills’ strategy?
How easy would it be for larger airlines such as BA to imitate the strategy?
On what bases could other low-price airlines compete with Ryanair?
Strategic Management © Niels Wergin 2009
© Niels Wergin 2009© Niels-Erik Wergin 2009