Resources-Based Strategic Options - Cost Reduction

Resources-Based Strategic Options - Cost Reduction

Introduction

With emergent of economy, strategic options are not longer focusing on just key options on expansion, sustaining competitive advantages, capabilities and core –competencies. Cost reduction of current operation activities must not be overlooked and neglect, as it form part of the agent in the key success of the company. With extensive pressure from new threat of entrant to the industry, it quite possible for organization to purchase raw material from less developed countries, engaged low wages foreign workers and even shift their whole production plant to third world countries, to reduce their current cost and maximise their financial benefit.

 

There are a few main routes of cost reduction to be discussed:

1) Design

In some industries, large cost reductions come not from activity in the production plant, but before the product ever reach the factory. By carefully designing the product –for instances, so that it has fewer parts or is simpler to manufacture-real reductions in cost can be achieved. In large organization, before a product is launched a through market research were conducted, buyer needs and wants, the market trends and consumer buying pattern are recorded, with this relevant information, R&D department could design more practical products. This lead to time and cost reduction in material wastage and chances of failure product launched.

2) Supplier Relationship

Due to increasing supply consolidation, a company’s overall performance and efficiency is more and more dependent on the capabilities of its suppliers. An organization benefits greatly when key suppliers dramatically reduce costs, introduce new services designed to address the organization’s needs, expand their footprint to provide seamless coverage in multiple regions, and work with the organization to streamline joint processes.

Benefit to Organization:

-Develops new services and products that can drive competitive advantage

-Closes capability and performance gaps

-Creates a reliable and long-term source of supply

-Provides access to new ideas and opportunities for improvement

-Prioritizes capability development and supplier investment

Benefit to Supplier:

-Creates additional revenue generation opportunities

-Enables the development of a long-term relationship

-Creates opportunities for joint investments

-Provides opportunity for supplier to advance to next tier

-Gives insight into customer organization’s business needs

3) Economic of Scale & Scope

When it is possible to perform an operation more efficiently or differently at large volumes, then the increased efficiency may result in lower costs .Economics of scale can lead to lower costs- for example in major petrochemical plants and in pulp and paper production. Whereas economic of scope occur when costs savings are available as a result of providing two distinct products from the same company compared with providing them from separate companies. An example might be those products that share the same retail outlet and can be delivered by the same transport. However with lack of production flexibility and the depersonalized nature of the work may be significant drawbacks on both economic of scale & scope.

Economic of scale are also available in areas outside production. They may occur in areas such as

1) Research and development: On some occasions, only a large scale operation can justify special services or items of testing equipment.

 

2) Marketing: Really large companies are able to aggregate separate advertising budgets into one massive fund and negotiate extra media discounts that are simply not available to smaller companies.

3)Distribution: Loads can be grouped and selected to maximise the use of carrying capacity on transport vehicles traveling between fixed destinations.

4) Using the  experience curve effect  

It suggests that significant reductions in costs are achieved as companies and the whole industry produce more product. The cost reductions relate to the cumulative production ever achieved, not just in one year.

The cost experience concept can be seen at both the company level and the industry level.

-at the company level, the market leader will, by definition, have produced cumulatively more product than any other company. The leader should have the lowest costs and other companies should be at a disadvantage.

-at the industry level, costs should fall as the industry overall produces more .Every company should benefit from knowledge that is circulated within it industrial.

Even within an industry, there are ways of overcoming experience curve effects, the most obvious being by new technology. Another way would be to entice an employee of a more experienced company to join the organization, there are real limits to the benefit of the experience curve as per follow,

1)    Market demand in market segments for a special product change or variation cannot easily be met: to achieve scale, production flexibility may have to be sacrificed.

2)    Technical innovation can overtake learning in a more fundamental way: a new invention may radically alter the cost profile of an existing operation.

3)    Demand needs to double for every significant proportionate cost reduction. In markets where growth is still present but slowing down, this is only possible if an ever-larger market share is obtained. As market share becomes larger, this becomes progressively more difficult and expensive to achieve.

5) Capacity Utilisation

This is an important consideration into cost reduction. Capacity utilization is a concept in economics which refers to the extent to which an enterprise or a nation actually uses its installed productive capacity. Thus, it refers to the relationship between potential output 'could' be produced and actual output that 'is' produced with installed equipment.

 

There are a number of reasons why a firm might be experiencing low capacity utilisation, including the following:

        

• Fall in market demand due to changes in consumer tastes or fashion
• Unsuccessful marketing – one or more aspect of the marketing mix may simply mean that the firm is not successful
• Seasonal demand – this is especially apparent in the tourist industry where firms like hotels and leisure parks are full in the summer but see much lower utilisation at other times of the year
• New competitors taking market share or causing over-supply in the market

Problems arising from low capacity utilisation

• Staff can become bored and demoralised if they don’t have as much to do, especially if they fear losing their jobs
• Higher fixed costs per unit mean reduced profitability; if prices were raised to cover these costs, this would probably lead to reduced sales unless the product was price inelastic
• Spare capacity can portray a negative image, particularly in a business where it can be seen that it is no longer busy – such as a shop or a health club - signifying loss of popularity

Benefits of low capacity utilisation

Low capacity utilisation is unlikely to be desirable in the long term as the higher unit costs will make it difficult to compete. However it is not all bad news and possible short term benefits include:

• There may be less stress for employees than if they were working at full capacity
• The firm can cope with new orders; firms in expanding markets may expect to have low utilisation whilst they build their sales
• A firm may have more time for maintenance and repairs and for staff training, to prepare for an upturn in trade

6) Synergistic effects

In exploring cost cutting options, it is possible to develop a model which examine this in a structural and cross functional way. Overall, the model does not pretend to be comprehensive but rather to show the options that are possible, their logical flow and the interconnections between the various elements.

The synergistic effects also create the opportunity of a combined corporate entity to reduce or eliminate expenses associated with running a business. Cost synergies are realized by eliminating positions that are viewed as duplicate within the merged entity. Examples include the head quarters office of one of the predecessor companies, certain executives, the human resources department, or other employees of the predecessor companies.

Conclusion

In conclusion, on above factors that contribute to cost reduction, I will like to further add on, for cost reduction strategy to be successful implemented. Company must have proper management planning before proceed, this proper management planning will reduce the risk of failure and prevent any interruption of work process.