Cost Leadership

Chapter 4
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Cost Leadership
Strategy that generates economic value by providing products—goods or services—with features acceptable to customers at lower costs than competitors. (Not necessarily lower prices but definitely lower costs.)
Why cost leadership matters
Creates above normal economic returns.
Economies of Scale
Average cost per unit falls as quantity increases until maximum efficient scale is reached.
Diseconomies of Scale
Average cost per unit increases as quantity increases.
Sources of Cost Advantage (6)
Economies of scale, diseconomies of scale, learning curve economics, Differential Low-Cost Access to Productive Inputs, Technology independent of scale, policy choices.
What are the two generic business level strategies
cost leadership, product differentiation
Why are cost leadership and product differentiation "generic strategies"
They can be used by any organization in any industry.
New Entrants (value of cost advantage)
Increases capital requirements to break into industry
Buyers (value of cost advantage)
lowers incentives to vertically integrate
Substitutes (value of cost advantage)
limits attractiveness of similar items
Suppliers (value of cost advantage)
Increases the importance of the focal firm
Rivalry (value of cost advantage)
Competitors rationally avoid price competition
What are the three organizational structures
simple, functional, multi-divisional
Simple structure
Owner/Manager makes all major decisions and monitors all activities. (Difficult to maintain as firms grow)
Functional Structure (U-Form)
Divides management responsibilities by function. CEO is only exec with enterprise-wide perspective.
Multi-Divisional Structure (M-Form)
For large firms. Functions are replicated in each division as appropriate. CEO works with others, information filters through layers.
What structure is best for the cost leadership strategy?
Functional
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