Egypt case: Discuss an example of a company that is successful in adopting a cost leadership strategy. How does it able to execute this strategy?

In the last meeting for my company, the main issue of our Agenda is to decline our costs, we want to decrease our expenses without affecting the quality of our products. The discussion took a long time, and some suggestions regarding the issue which is our trial to adopt the cost leadership strategy moved around, looking for other cheaper suppliers, importing our raw materials myself, firing additional employees, adding more jobs to some employees, decreasing the quality of packages without affecting the product quality, and much more of suggestions which all seek to adopt the cost leadership strategy for our company in the short run.

Also, I can remember my work in IBS (international business solution), it’s an outsourcing company specializing in providing banks, and corporations with staff in sales, customer service, and more. I worked for HSBC but my main salary was from IBS, why did HSBC do that? To decrease the costs, the bank adopts that strategy and so he found a company that is outsourcing one to make training, hiring, monitoring, and much more for the employees, all of this leads to decreasing costs for HSBC.

Also, Vodafone Egypt deals with Wasla, Teleperformance, Ecco, and Delta for Customer service employees and even stores in the streets, they save a lot of money in training, hiring, and monitoring employees and get other companies to do so, you will find many companies succeeded in this issue like Sutherland when they serve At&T and Verizon in the USA while they work here in Alexandria Egypt. Why AT&T do so because they adopt cost leadership strategies. The companies use outsourcing strategies to decrease the costs and responsibilities at the same time, also giving the order to professionals will improve the ultimate service levels.

Cost leadership example: IKEA

Needless to say, the famous Swedish furniture retailer has absolutely revolutionized the furniture industry.

By producing huge quantities of standardized products that people can actually assemble themselves, IKEA has gained a?significant competitive advantage?with its cost leadership strategy. Today, the multinational group operates 433 stores across 52 countries.

IKEA is an absolute leader in the furniture industry when it comes to low costs, and here is why:

Standardized products?– as opposed to competitors, IKEA doesn’t offer personalized products. Practically all of them are standardized, which allows the company to produce them in huge quantities for all of its stores worldwide. And achieve economies of scales that smaller competitors are just not able to.

Self–assembly?– the retailer seeks for suppliers who are able to manufacture quality subassemblies at the lowest costs possible, with customers having to assemble the furniture themselves. Which is one reason why their prices are so low, as IKEA doesn’t spend budget on employees for the assembly process. You could hire them additionally, but they are not included in the basic product price.

Outsourcing?– as many other companies do, IKEA also outsources the manufacturing of its products in low-wage countries, which allows them to cuts on costs additionally.

Interestingly enough, IKEA also follows a?differentiation strategy?to a certain extent, along with its cost leadership advantage. The company practically invented a completely new and innovative business model that people instantly loved.

A company pursuing a Cost Leadership strategy aims to establish a competitive advantage by achieving the lowest operational costs in their sector. Some cost leadership examples include McDonald’s, Walmart, RyanAir, Primark and IKEA.

For example, let’s imagine a company that’s manufacturing chairs. If the company would produce customized chairs for each particular customer, its operational costs would be really high. Why?

Because each chair will be ordered at a different time, with different materials and colors, and even the process or technology of its manufacturing might differ. The high level of customization would not allow the company to exploit?scale of production?nor?standardized processes.

Now imagine that the same company is producing highly standardized chairs that all look the same, no matter the preferences of the client. This company would be able to?improve its efficiency?by leveraging?economies of scale, ?and lower production costs by using fewer and more simple, standard components.

Economies of scale: cost advantages achieved by increasing production and lowering costs. As costs are spread over a larger number of goods, the cost per single unit decreases.

The Cost Leadership strategy is often confused with Price Leadership, but these are two different concepts. A company that has achieved the lowest production costs?might not necessarily offer the lowest prices.

If that happens, then the company would have profit margins that are higher than the average. However, many businesses that pursue a Cost Leadership strategy usually compete on price as well, and they are very efficient at it due to?low-cost management and structure.

Cost leadership. With a cost leadership strategy, the organization aggressively seeks efficient facilities, pursues cost reductions, and uses tight cost controls to produce products more efficiently than competitors. A low-cost position means that the company can undercut competitors’ prices and still offer comparable quality and earn a reasonable profit.

Cost leadership is a type of competitive strategy with which the organization aggressively seeks efficient facilities, cuts costs, and employs tight cost controls to be more efficient than competitors

Examples:

Comfort Inn and Motel 6 are low-priced alternatives to Four Seasons or Marriott. Enterprise.

Rent-A-Car is a low-priced alternative to Hertz.

The most efficient, low-cost company is in the best position to succeed in a price war while still making a profit. Likewise, the low-cost producer is protected from powerful customers and suppliers, because customers cannot find lower prices elsewhere, and other buyers would have less slack for price negotiation with suppliers. If substitute products or potential new entrants occur, the low-cost producer is better positioned than higher-cost rivals to prevent loss of market share. The low-price acts as a barrier against new entrants and substitute products.