Some competitors automate to become the lowest cost players

Symptom: Some competitors are automating to achieve the lowest costs in the industry.

Implications for the market:

  • Automation is essential; changing the way functions are managed will both reduce costs and increase flexibility.

  • The beneficial effects will, however, be temporary. New approaches to managing a function are a lot like new product features: If they prove successful, they can and will be copied by competitors (albeit automation is not copied as fast as new features). Once several competitors have copied a new approach, it no longer presents the innovator with low cost relative to competition.

  • An even more effective approach to reducing relative costs is to complement automation with more attention to the customer relationship.

    • A supplier's major customers provide the volume that allows reduction in unit costs. Economies of scale can work in hostility. And an established relationship with a satisfied customer is difficult to break.

    • If the customer relationship results in greater volume, the growth of the business will enable a company to reduce its unit costs. A gain in share should allow the company to reduce its relative unit cost and improve its returns compared to those of the competition.

Recommended Reading
For a greater overall perspective on this subject, we recommend the following related items:


Perspectives: Conclusions we have reached as a result of our long-term study and observations.

  • "Achieving The Low Cost Position"
    Most people think primarily of physical costs. However, a second, less understood type of cost is more important and holds the key to achieving the true low cost position

  • "Can We Raise Margins With A Price Increase?"
    Before a company commits itself to a price increase, it should check marginal costs in the industry and the ability of low cost producers to expand.

  • "Costs: The Last Consideration"
    As margins fall and profitability slides, the obvious first response is to cut cost. Knowing why that may be the wrong choice requires an understanding of the difference between effective cost control in hostile and non-hostile markets.

  • "Cutting The Right Cost"
    When markets turn hostile, managers turn to cost cutting. Reducing cost seems like the most direct route to improving profitability. Often, though, efforts to control costs make the situation worse.