Low Cost Strategy

The real question isn’t how well
you’re doing today against your

own history, but how you’re
doing against your competitors.
Donald Kress
PENN STATE UNIVERSITY
COMPETITIVE STRATEGY:
LOW COST
Jeffrey A. Krug
Session Outline
1. Competitive Advantage.
2. Competitor Analysis.
3. Customer Analysis.
4. Business Strategy.
5. Low-Cost Strategies.
6. Importance of Market Share.
© 2023 Jeffrey A. Krug Competitive Strategy 2

A Framework for Strategic Thinking
Competitive Strategies
The Strategic Thinking Funnel
▪ Corporate Level Strategy
➢ Selecting the Business (Niche).
➢ Determining the Direction.
▪ The Business Level Strategy

➢ Creating the Competitive Advantage.
▪ The Functional Level Strategies

➢ Marketing: Creating Demand.
➢ Operations: Delivering what is wanted and promised.
➢ HR: Getting, training, organizing, rewarding.
➢ Finance: Funding and creating profit.
Core Ideas of Competitive Advantage
▪ Why does customer buy product? Defining Business
▪ What distinctive competencies lead to Customer
CA?
▪ Use R&C to create competencies. Needs
▪ Match firm’s R&B with industry and
Key Success Factors
competitive environment.
▪ Always think of CA in relative terms. Resources &
▪ Strive for multiple sources of CA. Capabilities
▪ Align two faces of CA: “On stage”
Distinctive
customer buying criteria and “Back Competencies
stage” capabilities.
▪ Expect terms of competition to shift over Competitive
time. Advantage
Competitive Advantage
Fundamental Questions:
➢ How does firm generate competitive
advantage?
➢ How does firm sustain advantage?
Sustainability = “Barriers to
Imitation”:
➢ How long before rival imitates first
mover?
➢ How fast does new imitation occur?

The Evolution of Honda Motor Company
50cc 2-cycle engine

Related products:
ground tillers, marine
Founding of 405cc
engines, generators,
Honda motor motor
4 cycle pumps, chainsaws
company cycle
engines
1948 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995
First product: The 50cc N360 mini 1000cc Acura Car

clip-on engine super car Goldwing division
for bicycles -cub touring
motor cycle

Canon: Products and Core Technical Capabilities
Precision Fine
Mechanics Optics
35mm SLR camera Plain-paper copier

Compact fashion camera Color copier
EOS auto-focus camera Color laser copier
Digital camera Laser copier
Basic fax
Video still camera
Laser fax
Mask aligners Inkjet printer
Excimer laser aligners Laser printer
Stepper aligners Color video printer
Calculator
Notebook computer
Micro-
Electronics
Session Outline

Competitor Analysis
▪ Who are the competitors?
▪ Who will they be in the future?
▪ What information is required
▪ What drives each competitor?
▪ Current Strategies.
▪ Future Goals, Directions, and Strategies.
▪ What is each competitor doing and what
can they do?
▪ Capabilities = Advantages and
Disadvantages.
Retail Industry
Strategic Dimensions
Product Channel Product Breadth
• Price • City • Broad.
• Quality • Strip Mall • Specialized.
• Functionality • Malls
• Psychological • Suburbs (Free-Standing)
Buying Habits Other Income

• Week day (Convenience) • Location (Convenience) • Lower
• Weekend (Price, variety) • Service • Middle
• Periodic (Luxury, • Image • High
specialty purchases)

SG Map of Retail Jewelry Industry
High Small
Price / Quality / Image
Independent National, Regional,

Guild Jewelers & Local Guild - Prestige
“Fine Jewelry” Departmentalized Upscale
Stores Retailers Department
Stores
National
Jewelry
Chains
Medium
Chains
Local Credit
Jewelers Jewelers Catalog
Showrooms
Off-Price
Outlet Mall Retailers Retailers Discounters
Low
Specialty Full-line Limited-category Broad-category

Jewelers Jewelers Retailers Retailers
Product Line / Merchandise Mix

Strategic Groups - Pharmaceuticals
High
Proprietary
• Merck
Group
Prices Charged
• Pfizer
• Eli Lilly
Generic
• Marion Labs
Group
• Carter Wallace
• INC Pharmaceut’l
Low
Low High
R&D Spending
Strategic Groups – Restaurants
High
Red Lobster
Olive Garden
ChiChi's
Perkins
International House
of Pancakes
Ponderosa
Price Bonanza Shoney's
Denny's
Country Kitchen
Kentucky Fried Chicken

Pizza Hut
Long John Silver's
Arby's Wendy's
Domino's Dairy Queen
Hardee's Taco Bell
Burger King McDonald's
Low
Limited Menu Full Menu
Product-Line Breadth
Strategic Groups in the World Automobile Industry
GLOBAL, BROAD-LINE
PRODUCERS
Broad REGIONALLY-FOCUSED e.g., GM, Ford, Toyota,
BROAD-LINE Nissan, Honda, VW, Daimler
PRODUCERS Chrysler
e.g. Fiat, PSA, Renault,
GLOBAL SUPPLIERS OF
NARROW MODEL RANGE
NATIONALLY FOCUSED, e.g., Volvo, Subaru, Isuzu,
INTERMEDIATE LINE Suzuki, Hyundai
PRODUCERS
PRODUCT e.g. Tofas, Kia, Proton, Maruti
RANGE LUXURY CAR
MANUFACTURERS
e.g., Jaguar, Rolls Royce,
NATIONALLY- FOCUSED, BMW
SMALL, SPECIALIST
PRODUCERS e.g., Bristol
(U.K.), Classic Roadsters
(U.S.), Morgan (U.K.) PERFORMANCE
CAR PRODUCERS
e.g., Porsche,
Maserati, Lotus
Narrow
National GEOGRAPHICAL SCOPE Global

Session Outline

Competitive Advantage
Customers: Relationship to Business
Strategy
Who will be
served?
Key Issues
in What needs will
Business-level be satisfied?
Strategy
How will those

needs be satisfied?

Customer Analysis
▪ Who are the core customers?
▪ What do they value?

➢ Fulfilling these become the
industry’s key success factors.

Customer Value Analysis
▪ What does the customer value?
▪ Examples:
➢ Price.
➢ Quality.
➢ Reliability.
➢ Service.
➢ Location.
➢ Functionality.
➢ Performance.
➢ Convenience.
Customer Value Analysis
Mercedes vs Lexus
Trouble free
Fuel Economy
Aesthetics
Service
Comfort
Driveability
Large & Roomy
Brand Image
Safety
Price

Session Outline

Business Strategy
COST
ADVANTAGE
COMPETITIVE
ADVANTAGE
DIFFERENTIATION
ADVANTAGE

Business Strategy
Porter’s Generic Strategies
Lower Cost Differentiation
Broad Range
of Buyers
Overall Low-Cost Broad
Leadership Differentiation
Market Target
Strategy Strategy
Best-Cost
Provider
Strategy
Focused Focused
Narrow
Buyer Low-Cost Differentiation
Segment Strategy Strategy
or Niche

Business Strategy
Porter’s Theory of Competitive
Advantage
Distinctive Competencies
Sustainable Competitive Advantage
Sustainable Superior Performance

Business Strategy
Advantage The Competitive
Sources of Advantage Advantage Cycle
Key success
• Superior assets
factors
•Superior capabilities
Performance
Positional Rewards
• Satisfaction Investments In
Advantages Realized Renewal
• Loyalty
• Superior Value
•Profits
•Share
Competitive
Barriers to Dynamics Erode
imitation Advantages
Business Strategy
Advantage
Any competitive advantage
currently held will eventually be
eroded by the actions of
competent, resourceful
competitors!

Business Strategy
Porter’s Theory of Competitive Advantage
Size of Competitive Advantage
Buildup Benefit Period Erosion Period

Period
Size of
Competitive
Strategic Advantage Moves by
Moves Achieved Rivals
Produce Reduce
Competitive Competitive
Advantage Advantage
Time
Session Outline

Low Cost Strategies
When To Use A Low-Cost Strategy
Homogeneous Customer
Preferences.
High Fixed Costs of Entry.
Mature Industries.
Proprietary Process Technology.

Low Cost Strategies
Sources of Low-Cost Advantages
ECONOMIES OF SCALE • Higher production.
• Lower fixed costs per unit.
LEARVING CURVE EFFECTS • Greater units/work period.

• Lower defects.
• Automation.
PRODUCTION TECHNIQUES • Total quality management (TQM).
• Just-in-time inventory systems.
PRODUCT DESIGN • Designs for automation.

• Designs to economize on materials.
• Location advantages.
INPUT COSTS • Bargaining power.
• Supplier cooperation.
CAPACITY UTILIZATION • Efficient level of production.
MANAGERIAL/ ORGANIZATIONAL
EFFICIENCY
© 2023 Jeffrey A. Krug Competitive Strategy• Organizational slack. 29
Low Cost Strategies
Economies of Scale

Low Cost Strategies
Scale in Soft Drinks
Despite massive advertising by Coke and Pepsi, it is the smaller
brands that incur the highest advertising costs per unit of sales
Advertising Expenditure ($ per case)
0.02 0.05 0.10 0.15 0.20
Schweppes
Tab
Diet 7-Up Diet Pepsi
Fresca
Seven up
Sprite Dr. Pepper

Pepsi Coke
10 20 50 100 200 500 1,000

Annual sales volume (millions of cases)

Low Cost Strategies
Economies of Scale

Low Cost Strategies
Scale in Airlines
Costs per Available Seat-Mile (1993)
Southwest Airlines United Airlines
(cents) (cents)
Wages and benefits 2.4 3.5
Fuel and oil 1.1 1.1
Aircraft ownership 0.7 0.8
Aircraft maintenance 0.6 0.3
Commissions on ticket sales 0.5 1.0
Advertising 0.2 0.2
Food and beverage 0.0 0.5
Other 1.7 3.1
Total 7.2 10.5

Low Cost Strategies
Flexible Manufacturing

Low Cost Strategies
Learning Curve Effects

Low Cost Strategies
When Not To Use A Low-Cost
Strategy
Changing Production Technologies.
➢ From High to Low Entry Barriers.
Changing Customer Preferences.

➢ Ability to differentiate commodity products.
Transition From Mature to Declining Industry.

➢ Increasing Price Competition with High Exit
Barriers.
Increased Supplier Power.

➢ Increasing Concentration of Supplier Power.
Session Outline

Importance of Market Share
If all firms in an industry have the same experience curve, then:
relative costs = f (relative market share)
This supported by PIMS data:
10
ROS (%)
5-2 0
0-10 10-20 20-30 30-40 over 40

Market Share (%)
BUT: - Association does not imply causation

- Costs of acquiring share may offset returns to share

Low Cost Strategy

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The real question isn’t how well

you’re doing today against your

PENN STATE UNIVERSITY

© 2023 Jeffrey A. Krug Competitive Strategy 2

▪ The Business Level Strategy

▪ The Functional Level Strategies

© 2023 Jeffrey A. Krug Competitive Strategy 5

50cc 2-cycle engine

First product: The 50cc N360 mini 1000cc Acura Car

© 2023 Jeffrey A. Krug Competitive Strategy 6

35mm SLR camera Plain-paper copier

© 2023 Jeffrey A. Krug Competitive Strategy 8

Buying Habits Other Income

© 2023 Jeffrey A. Krug Competitive Strategy 10

Independent National, Regional,

Specialty Full-line Limited-category Broad-category

© 2023 Jeffrey A. Krug Competitive Strategy 11

Kentucky Fried Chicken

National GEOGRAPHICAL SCOPE Global

© 2023 Jeffrey A. Krug Competitive Strategy 14

© 2023 Jeffrey A. Krug Competitive Strategy 15

How will those

© 2023 Jeffrey A. Krug Competitive Strategy 16

▪ What do they value?

© 2023 Jeffrey A. Krug Competitive Strategy 17

© 2023 Jeffrey A. Krug Competitive Strategy 19

© 2023 Jeffrey A. Krug Competitive Strategy 20

© 2023 Jeffrey A. Krug Competitive Strategy 21

© 2023 Jeffrey A. Krug Competitive Strategy 22

Sustainable Competitive Advantage

Sustainable Superior Performance

© 2023 Jeffrey A. Krug Competitive Strategy 23

© 2023 Jeffrey A. Krug Competitive Strategy 25

Buildup Benefit Period Erosion Period

© 2023 Jeffrey A. Krug Competitive Strategy 27

High Fixed Costs of Entry.

Proprietary Process Technology.

LEARVING CURVE EFFECTS • Greater units/work period.

PRODUCT DESIGN • Designs for automation.

CAPACITY UTILIZATION • Efficient level of production.

© 2023 Jeffrey A. Krug Competitive Strategy 30

Sprite Dr. Pepper

10 20 50 100 200 500 1,000

© 2023 Jeffrey A. Krug Competitive Strategy 31

© 2023 Jeffrey A. Krug Competitive Strategy 32

© 2023 Jeffrey A. Krug Competitive Strategy 33

© 2023 Jeffrey A. Krug Competitive Strategy 34

© 2023 Jeffrey A. Krug Competitive Strategy 35

Changing Customer Preferences.

Transition From Mature to Declining Industry.

Increased Supplier Power.

© 2023 Jeffrey A. Krug Competitive Strategy 37

0-10 10-20 20-30 30-40 over 40

BUT: - Association does not imply causation

© 2023 Jeffrey A. Krug Competitive Strategy 38

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