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Overall Cost leadership

Costing Assignment

Sachin Lakade:-32
Why overall cost leadership
 Overall cost leadership is achieved by the
firm that is able to maintain the lowest
costs of production and distribution within
an industry.

 Firms pursuing this strategy must be
effective in engineering, purchasing,
manufacturing, and physical distribution.
Marketing is less important.

 Overall cost leadership is achieved when you offer a
"standard" product, but your costs are significantly
lower than the average for the industry.

 However, it is important that low costs must not be
perceived as low quality by the customer,because in
that case you will have to lower your price and this will
destroy your competitive advantage.

 Low costs enable the leader to price its products lower

than its competitors in order to win a large market

 Firms with a large share of the market are usually able to
achieve lower costs through economies of scale, and
the experience effect.

 Low costs are achieved in two ways

◦ More efficient production arising from experience.

This occurs because doing the same thing many
times leads to finding more efficient methods of

◦ Economies of scale. In every industry there is a most
efficient size of plant, management structure and
so forth.

◦ Through innovation in production methods, leading to
new techniques of production or better organisation
of production.

What is the Benefit:-
 The lowest cost producer is able to survive in a
price war.
 Supernormal profits generate internal finance
that can be reinvested to improve quality and
continue cutting costs.

  Risks associated with low cost strategy

◦ Poorly focused on customer needs.
◦ Production oriented
◦ Many routes to a low cost position can be easily
◦ Company may not survive in price war.

Scale Effect
 Economies of scale are achieved primarily
through the size of operations.

 Large businesses have the potential to operate

at lower unit costs. Large-scale plants, for
example, are cheaper to build, and they yield
lower operating costs per unit of output.

 Although the most substantial gains are usually

seen in manufacturing, benefits of scale can
be achieved in marketing, sales, distribution,
administration, R&D, and service.

 The cost of raw materials and shipping can also

be reduced through economies of scale.

Experience Effect

 The experience effect, or "experience

curve", refers to the cumulative number of
units produced by a company to date.

 The cost of production declines 10-

30 percent each time the firm doubles its
experience at producing the units.

 Businesses with large market shares

typically have more experience, and
consequently, lower costs.

Thank you