What are the strategic options for remedying a cost disadvantage?

Answer 1

1. Value chain analysis and benchmarking can reveal a great deal about a firm's cost competitiveness.

-2. There are three main areas in a company's overall value chain where important differences in the costs of competing firms can occur: a company's own activity segments, suppliers' part of the industry value chain, and the forward channel portion of the industry chain.

-3. When the source of a firm's cost disadvantage is internal, managers can use any of the following eight strategic approaches to restore cost parity:

• Implement the use of best practices throughout the company, particularly for high-cost activities
• Try to eliminate some cost-producing activities altogether by revamping the value chain
• Relocate high-cost activities to geographic areas where they can be performed more cheaply
• Search out activities that can be outsourced from vendors or performed by contractors more cheaply than they can be done internally
• Invest in productivity-enhancing, cost-saving technological improvements
• Innovate around the troublesome cost components
• Simplify the product design so that it can be manufactured or assembled quickly and more economically
• Try to make up the internal cost disadvantage by achieving savings in the other two parts of the value chain system.

-4. If a firm finds that it has a cost disadvantage stemming from costs in the supplier or forward channel portions of the industry value chain, then the task of reducing its costs to levels more in line with competitors usually has to extend beyond the firm's own in-house operations.