According to Porter, a business can build a substantial competitive advantage by adopting one of two strategies:
(a) A differentiation of the product, or
(b) A low-cost strategy.
While this may be true in the short-run; in the long-run the roots of competitiveness remain in the firm’s core competencies and core capabilities. In a global, competitive environment, technology and brands give a temporary advantage. Product differentiations— that is, its features and values—are quickly observed and imitated by the competitors.
A most sustainable competitive advantage is a cost edge.
For a low cost strategy, a firm should make strategic moves on the following lines:
(i) Trying to be the cost leader in its industry, namely, the lowest cost producer at least in some products and services/territories/segments.
(ii) Trying to be among the cost leaders, say among one-third of the lower cost producers overall in its industry.
(iii) Not using fully the cost advantage for fierce price-cutting but using a part of it, if necessary, for a price advantage.
(iv) Investing a part of the cost advantage in tomorrow’s technology, materials and processes in order to build the foundation for future, while continuing cost leadership.
(v) Treating the vendors as extended parts of the enterprise and helping them with technology, systems, and skills for cost leadership in their supplies.
(vi) Similarly, building a strategic partnerships with the dealers for superior cost- effective distribution and customer service.
Low Cost Strategy—Shared Vision 2000 (First Decade):
The schemes of cost control and cost reduction are needed to be strengthened right away. But cost leadership cannot be achieved overnight.
There is a need for a long-term strategic approach along the following lines:
(i) Getting the top/senior management team to brainstorm a shared Vision for 2000 A.D.
Such Vision should have two dimensions:
Qualitative:
In addition to image aspirations for quality, service, and customer satisfaction, there should be elements like cost effectiveness, value for money and cost leadership.
Quantitative:
Besides the ‘target sales’, there should be a ‘demanding profit goal’ based on continuous cost reduction, innovation and higher productivity.
(ii) Disseminating the draft Vision to the Divisions/SBUs/Profit centres and allowing them to raise queries and pose challenges so as to improve and validate the Vision.
(iii) Revisiting the Vision and examining organisational vulnerabilities in achieving the cost and profit dimensions. And analysing sensitivity to strategic cost management issues.
(iv) Taking strategically determined vendors and dealers into confidence on the Vision.
Strategic Business Plans—Vision 2000—Oriented:
This involves breaking up the overall growth Vision into various SBUs, and inviting the SBUs to formulate detailed strategic plans so as to help them achieve their growth and profit targets, with necessary thrust on cost reduction in the face of increasingly fierce competition.
The process requires:
(i) Getting the Divisional Management Committees (DMCs) not to do the planning unilaterally top-down but to empower the middle management to initiate a draft plan in line with the Divisional Vision.
(ii) Guiding the DMCs to set up cross-functional team of executives consisting of at least one member from marketing, finance, human resources and systems, as the Planning Task Force (PTF). The Finance member of the PTF should preferably be the division’s cost accountant. At the divisional level, the key finance task is cost management, whereas at” corporate level, it is treasury management.
(iii) Providing the PTF with a planning manual and training in planning methodology and skills.
(iv) While reviewing the PTF’s draft plan, the DMC should look, among other things, at the strategies for cost reduction and cost leadership.
(v) While monitoring the implementation of the Plan, the DMC should not remain contended with just achieving the sales growth but look at the bottom line as well as the major cost elements. Even if profit targets look reasonably right and are being temporarily met, the DMC should get people to constantly watch and examine whether the cost structure will sustain the profits.