Part 1: Quantifying Cost Reduction Objectives

Matching Competitive Cost Advantages

There are three places to look for competitive advantages: rates of cost, approaches to managing functional costs and productivity, or Economies of Scale. The first two of these are visible to the Company and enable the Company to evaluate its opportunities to match these competitive advantages.

For helpful context on this step:

The Company may exploit its knowledge of its industry and competitors to make comparisons with its industry peers. There are two basic types of comparisons the Company may make. The first compares the Company to its competitors on the rates of costs each pays for its people and major purchases. Rates are units of currency per time period for people or units of currency per unit of purchases. The second comparison is more subtle and more difficult. This comparison evaluates the Company's approach to managing cost functions to those of competitors.
These comparisons suggest the degree of any disadvantage the Company faces against current competition and warn of newer and better approaches to managing costs in the industry.

We discuss each of these comparisons in the following sections:

Rates of Costs

Capsule: A company achieves low rates of costs because of the sources, the size, or the timing of its purchases. It may also have an advantage due to the components of the rate of costs.

Approaches to Managing Functional Costs

Capsule: Manufacturing and distribution businesses have different cost functions. Both these businesses, however, may see the development of new approaches to managing their respective cost functions. The Company should be particularly sensitive to new approaches to managing functional costs and to the cost advantages these new approaches might yield. Always, though, the Company must protect the customer relationship.

We begin this cost comparison with an evaluation of the rate of cost disadvantages the Company has compared to the industry’s low cost competitors.

Basic Strategy Guide Users Return To: Step 25

Summary Points Next: Rate of Costs