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
- 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
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.