StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Cost Advantage Process - Essay Example

Cite this document
Summary
The paper "Cost Advantage Process" discusses that Michael Porter identified the major cost drivers of a firm as economies of scale, location, learning, capacity utilization, linkages, interrelationships, integration, timing, discretionary policies, and institutional factors…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER94.8% of users find it useful
Cost Advantage Process
Read Text Preview

Extract of sample "Cost Advantage Process"

Productivity provides opportunities - from a complex machine center operation to even routine tasks like collecting stores or selecting a channel for distribution. It is one of the drivers behind the success of suggestion-box schemes, where employees with hands-on experience are rewarded for suggestions for improving efficiency.

Capacity utilization:
Resources of a firm in the form of different assets like men, machinery, money, etc. are put to different levels of utilization. It is possible to improve the levels and achieve a better balance to reduce fixed/variable costs per unit, with better volumes.

Linkages:

This explains the interrelationship between activities both within and without a firm. At the broadest level, the critical path method (CPM) or project evaluation and review techniques (PERT) can be seen as the typical study of linkages in project planning operations. The idea is to see that wastage and inefficiency are eliminated in completing different tasks that have dependencies. The Japanese inventory control system, just-in-time (JIT), is typical of the examples of deriving cost efficiencies of input supplies, a process in which even suppliers’ value activities are studied and improved upon to create a win-win situation for both.

Interrelationships:
This is the process of identifying the interrelationship of activities of the different units of a firm, which are amenable to improved efficiencies e.g., administration, recruitment/training, or purchases.
Integration:
Popularly called backward and forward integration processes, this identifies activities upstream or downstream of the current operations to locate opportunities for integration that would result in cost efficiencies/value addition or both. For example, a steel rerolling unit may examine setting up facilities for steel melting (backward) or end-product fabrication (forward).

Timing:

First-mover or late-mover advantages/disadvantages play a role in operational costs. First-movers gain brand advantage and enjoy premium prices but may be tied up with expensive/obsolete machinery or methods over time; Late-movers learn from the mistakes of early-movers, and employ more modern and efficient machines but have to fight entrenched players to gain market share. Also, market conditions and seasonal factors influence operations and underscore the importance of timing.
Finally, a firm’s discretionary policies as per its objectives and goals, and institutional factors of agencies like the local/state/national governments and creditors, drive the cost advantage of a firm. Porter’s analysis also emphasizes the interplay of the different cost drivers and searches for scope for improved efficiencies, going beyond the conventional cost accounting method. In other words, for gaining cost advantage, it is less important to know ‘how much’ an activity costs than ‘why so much’.

2. Analyzing and deciding on steps

The competitor enjoys an average price premium of 0.6% and lower costs of 0.5% on account of maintenance and scrap, resulting in a net higher pre-tax margin of 5.1%, compared to my 4%. These cost benefits accrue to him due to the modern machinery employed by him. Since replacing my 30-year-old machinery or charging higher prices is ruled out, I have to look for alternative ways to generate more revenue to improve my returns. Thus, I have to work to gain more market share by emphasizing my lower prices and promoting superior value for money to customers. At the same time, I must improve volumes and reduce scrap generation to generate more output. Securing higher sales by utilizing existing resources more cost-effectively and efficiently would result in improved margins.

The first step in the process is to analyze if the capacity utilization of machinery is at optimum levels. If not, verify whether this was due to mechanical wear and tear, faulty production planning, insufficiently trained workmen, or a combination of all.

My machinery is decades-old but very usable, depreciation costs are negligible and I must cash in on this advantage vis-à-vis my competitor. Most machinery and tooling can be upgraded at nominal costs by replacing worn-out parts and putting in energy-efficient drives. This is much more economical compared to buying new machinery. Upgraded machinery can produce more and this would necessitate a relook at the planning process to plug gaps. In this process, all steps from the raw materials stage to finished-product shipping including outsourced components need to be reviewed to achieve cost efficiencies as described earlier in this paper. Similarly, better-skilled workmen not only produce more but cause fewer rejections. Hence I would audit their skills and arrange to retrain them where necessary.

The next step in the process is to market higher volumes of production without changing prices. For this purpose, I would gear up the marketing team to emphasize the superior value that customers get for their money, based on my firm’s long association with the market. To conclude, there is scope for gaining cost advantage through marginal investment, improved planning, and retraining workmen. Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Cost advantage Essay Example | Topics and Well Written Essays - 750 words”, n.d.)
Retrieved from https://studentshare.org/business/1425961-cost-advantage
(Cost Advantage Essay Example | Topics and Well Written Essays - 750 Words)
https://studentshare.org/business/1425961-cost-advantage.
“Cost Advantage Essay Example | Topics and Well Written Essays - 750 Words”, n.d. https://studentshare.org/business/1425961-cost-advantage.
  • Cited: 0 times

CHECK THESE SAMPLES OF Cost Advantage Process

Environmental Costs to Competitive Advantages

This paper "Environmental Costs to Competitive Advantages" shows the environmental costs had a huge impact on the competitive advantage in the surveyed pharmaceutical companies in Jordan.... Those variables affected competitive advantage and were in descending order with regard to the high impacts.... Reliable sources point out that the following stage of environmental management will go beyond compliance to encompass costs and competitive advantage....
5 Pages (1250 words) Research Paper

Supply Chain Management and the Creation of Competitive Advantages

Therefore, the processes involved can be summarized through a model that simplifies the supply chain process into three management processes (Yusuf, Gunasekaran, Adeleye & Sivayoganathan, 2004, 379).... However, there is a need for a change in SMG, which is facilitated by a shift from individual functions of management to integration of necessary activities in the process.... There are both physical and informational elements entailed in the process of SCM, which is perceived as the creation of value chain network that consists of individual functional units....
8 Pages (2000 words) Coursework

How Cost Drivers Create a Competitive Advantage for Their Companies

Essay: What are the key cost drivers and determinants of cost advantage needed by managers when using a price leadership strategy?... Likewise, if the incumbent firms exhibit cost advantages, the potential entrant could design strategies which include 'process innovation, increased efficiency, outsourcing, and contracts with customers' (Spulber, 2009, p.... The paper 'How Cost Drivers Create a Competitive advantage for Their Companies' seeks to evaluate the identified cost drivers, which can create a competitive advantage for the company through enabling the organization to select options for the most efficient cost possible in the mix of resources....
4 Pages (1000 words) Assignment

Holmgren Engineering

he benefits of the proposed changes will make the company achieve its goal of cost advantage, process simplification, and inventory management.... The company employs a current process of batching production orders in a layout that is jumbled and disarranged.... The production engineering head has made a proposal to the top management to change the process into a one-piece flow approach, redesign the facilities layout into a U-shaped assembly line, and transform the orientation into a make-to-order process....
6 Pages (1500 words) Case Study

Can Business Process Outsourcing Provide a Competitive Advantage to Businesses

The paper "Can Business process Outsourcing Provide a Competitive Advantage to Businesses" discusses that in case of outsourcing, the cost of hiring in-house experts in order to perform the certain process may exceed the cost of hiring a third party to handle all the issues related to those processes.... Different organizational components are present in this changing phenomenon like process, people and knowledge required to be handled carefully in order to avoid any effects on the businesses and organizations....
9 Pages (2250 words) Research Proposal

Environmental Costs to Competitive Advantages

This research paper "Environmental Costs to Competitive Advantages" presents the environmental costs that had a huge impact on the aspects of competitive advantage in the surveyed pharmaceutical companies in Jordan.... Those variables, which were independent, had an impact on the competitive advantage.... Second, in the grid were the environmental failure costs activities while the control costs activities had a lesser impact on the competitive advantage of the pharmaceutical companies in Jordan....
6 Pages (1500 words) Research Paper

Chain Management and the Creation of Competitive Advantages

Supply chain management refers to a design and management with the purpose of adding value to the process of meeting customer needs, which transcends the organizational boundaries.... Supply chain management refers to a design and management with the purpose of adding value to the process of meeting customer needs, which transcends the organizational boundaries.... Supply chain management refers to a design and management with the purpose of adding value to the process of meeting customer needs, which transcends the organizational boundaries (Fawcet, Ellram & Ogden, 2007, 8)....
8 Pages (2000 words) Case Study

How New Theories of Trade Influence Comparative Advantage

The paper "How New Theories of Trade Influence Comparative advantage" is a great example of an essay on macro and microeconomics.... Conventional models of a comparative advantage don't give sufficient account of world trade in manufactured goods trade.... The paper "How New Theories of Trade Influence Comparative advantage" is a great example of an essay on macro and microeconomics.... Conventional models of a comparative advantage don't give sufficient account of world trade in manufactured goods trade....
6 Pages (1500 words) Essay
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us