Today’s executives are cost conscious. In fact, cost leadership is a focus of competitive strategy for nearly 40 percent of midsize businesses.1 Companies are making it a strategic priority for good reason: It’s one of the widely cited “generic strategies” coined by Harvard Business School Professor Michael Porter.2
According to Porter, cost leadership is one of three main ways a company can shape its competitive strategy, and it boils down to having the lowest per-unit cost at a given level of quality. No two strategies are identical, but here are a few essential ideas to keep in mind, so you can set your business apart from the rest:
1. Ensure easy access to capital and efficient working capital
Having the continued ability to invest in your production assets creates a barrier to entry, keeping competitors from gaining ground.
Example: Cost leader Walmart incurred $13.1 billion in capital expenditure in fiscal year 2014 to expand its retail footprint in the U.S. and internationally.3
2. Develop proprietary technology
Investing in new technology may be expensive and result in short-term losses. However, a properly researched investment in technology should lead to expanded market share in the long run. Institute a vigorous R&D program to cultivate new developments and set the stage for future success.
Example: Amazon has disrupted the retail business in part by developing or acquiring proprietary technologies such as its Kiva robots, which streamline order fulfillment.4
3. Streamline your inputs and improve your relationship with suppliers
Having the best access to supplies is essential to competing on cost. Conduct financial modeling of your raw material inputs—incorporating risk analysis, projections and cost tracking— to more adequately forecast ROI and identify areas for consolidation.
Example: Seabridge Gold secured access to the world’s largest undeveloped gold and copper mine in British Columbia and Canada, which has an estimated life span of more than 50 years.5
4. Closely monitor labor costs
Supervising your workforce to ensure it is maximizing its time is critical. Consider using tracking software to see how your staff members are spending their work hours, or invest in scheduling software to staff the right number of people at peak times of day.
Example: Trucking company Schneider National uses tracking software to monitor drivers’ safety and performance on the road.6
5. Re-evaluate your production and administrative costs
Controlling costs by ensuring you have a streamlined organizational structure and small corporate staff will keep your business operations as lean as possible. Consider outsourcing any functions you don’t need to cover in-house.
Example: In order to reduce its general costs and improve margins, data storage company Quantum outsourced its sales and marketing divisions to an outside company, which saves both time and money.7
Facing a Low-cost Competitor?
It’s a familiar story, one replicated in industry after industry. After years of dominance, a market leader is shaken to its core by a low-cost rival. What comes next is the interesting part. Researchers have found that companies tend to respond in one of several ways:
- They ignore the upstart, which often forces the former market leader to vacate an entire market segment
- They respond to the pricing challenge, which often ignites a price war
- They experiment with a dual strategy by launching a low-cost product of their own
- They differentiate their offerings
The bottom line? There’s room for both low-cost and value-added companies. The important thing is for businesses to stay on the offensive. As Nirmalya Kumar of the London Business School wrote in the Harvard Business Review: “If incumbents don’t take on low-cost rivals quickly and effectively, they can blame no one for their failure but themselves.”