Ensuring the competitiveness of the company based on the cost minimization strategy
Developing a competitive strategy, firms seek to find and implement a way to compete profitable and long-term in their industry. There is no universal competitive strategy. Only a strategy that is consistent with the conditions of a particular industry, skills and capital that a particular firm possesses can bring success. Among the many strategies to increase the company's competitiveness, much attention is paid to cost-minimization strategies .
Low costs imply protection from competitors' rivalry, since lower costs mean that a company can receive revenues even after its competitors have already exhausted their profits in the course of rivalry. Low costs protect and from powerful buyers, as buyers can use their opportunities only to bring down its prices to the level of prices offered by a competitor, which effectively follows this firm. Low costs also protect from suppliers, providing greater flexibility to counteract them as input costs increase. Factors that lead to low costs usually create high barriers to entry of competitors into the industry - economies of scale or cost advantages. Finally, low costs usually put the company in a favorable position with respect to substitute products. Thus, the low cost position protects the firm from all five competitive forces, considered by the professor of the Harvard Business School Michael Porter, because the struggle for favorable terms of the transaction can reduce its profits only until the profits of the competitor following it are destroyed.
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The number of competitive forces includes:
- rivalry between competing producers of one industry;
- attempts by companies from other industries to attract consumers of products of this industry to the side of their substitute goods;
- the potential for entry into the industry of new companies;
- the market power of resource providers;
- the market power of buyers of products of this industry.
Of course, the minimum cost strategy is not suitable for every company. Thus, according to M. Porter, companies wishing to implement such a strategy should control large market shares in comparison with competitors or have sufficiently favorable access to raw materials. The goods must be designed in such a way that they can easily be produced. In addition, it is reasonable to produce a wide range of interrelated products in order to evenly distribute costs and reduce them for each individual product. Further, companies with low costs need to win a broad consumer base. Such a company can not be satisfied with small market niches. Once a company becomes a leader in minimizing costs, it acquires the ability to maintain a high level of profitability, and if it effectively reinvests its profits in upgrading equipment and enterprises, it will be able to retain leadership for some time. As examples of companies that did this way, Porter mentions "Briggs & amp; Strattion & quot ;, Lincoln Electric & quot ;, Texas Instruments & quot ;, Black & amp; Decker & quot ;, DuPont .
The factors that favor the effective application of the cost minimization strategy are:
- the dominance of price competition in the industry;
- high elasticity of demand for price;
- production of a sufficiently standardized product, limited possibilities for its differentiation;
- an equal opportunity for consumers to purchase goods from different manufacturers;
- the possession of consumers of goods of considerable power.
The purpose of using the strategy of minimizing costs is to achieve lower average production costs than competitors. Having achieved this goal, the firm can resort to some reduction in the price of the product, which is guaranteed to entail an increase in the sales of products and with a high probability increase the turnover and profit of the firm. It must be understood at the same time that leadership in minimizing costs is associated with some losses, inconveniences and dangers. While increased production often leads to lower costs, economies of scale are not automatic, and managers at low cost must be constantly on guard to ensure that potentially potentially saved funds are actually received. The manager must immediately respond to the need to dismantle obsolete assets, invest in technology - in short, do not lose sight of the costs. Finally, there is a danger that some new or old competitor will take advantage of the technology or cost management techniques applied by the leader and win. Leadership in minimizing costs can be an effective response to the actions of competitive forces, but it does not give any full guarantee of defeat.
The company that has made a bid on the cost minimization strategy needs to closely monitor changes in industry technologies, consumer preferences and be ready to make the necessary modernization or even a complete replacement of production facilities within an acceptable period or make appropriate adjustments to the range of products; otherwise it runs the risk of failing.
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The main industry-specific threats associated with the application of the cost minimization strategy are as follows:
- Achievements can open the way for competitors to reduce costs;
- competing firms can simply copy the methods of minimizing costs, for the implementation of which the company is a pioneer spent considerable money;
- Business can overestimate the willingness of customers to sacrifice quality for the sake of reducing prices;
- producers with lower costs (for example, from Southeast Asia or the countries of the former CIS) may suddenly appear on the market.
A cost leadership strategy and a strategy of focused low costs can be successfully implemented through continued cost management. To do this:
- create at the enterprise a system of planned costs with rigidly set reserves for expenditures;
- introduce flexible budgeting systems to manage production costs;
- to develop systems for monitoring the implementation of the budget.
It is important to take into account cost-accounting factors, such as factors traditionally considered in accounting (the price of raw materials, energy, wages of workers, etc.), structural factors depending on the nature of business (scale, range, experience) and functional , depending on the activities within the company itself (quality, design, technology).
Supporting the optimal cost strategy is the individual management of cost reduction and product quality improvement at the same time. Therefore, in order for the cost management system to be effective, it must be guided by the strategy being implemented.
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