Cost and Differentiation Strategies

A.Cost Reduction as competitive advantage
Cost Advantage (=> cost efficiency => cost cutting : restructuring, outsourcing, lean production…)is normally considered as the primary basis for competitive advantage in an industry.
The Key to cost-cutting is the study of the 8 factors that determine a firm’s cost position :
1. Economies of scale
Economies of scale exist wherever an increase in the amount of inputs employed in a production process results in a greater increase in total output. As the scale of production increases, the unit cost fall.
3 principal sources : 1. Technical input-output relationships : increases in output do not require proportionate increases in inputs. Ex 5l bottle of water not cost 5times 1l 2. Indivisibilities : Inputs unavailable in small sizes offer economies of scale as long as the company is able to spread the costs to these items over larger volumes of output. 3. Specialization : Mass production involves breaking down the production process into a series of separate tasks to be performed by specialized workers using specialized equipment.

Other Scale than scale production : packaged consumer (12packs of cigarettes…), scale in marketing (distribution industry).

Limits to scale economies : 3 reasons for not choosing scale economies 1. Differentiation : higher prices for niche market outweighs higher cost of the small volume production 2. Flexibility : Adapt rapidly to new technologies or changes in customer preferences 3. Complexity and motivation : companies not efficient with scale economies

2.Economies of Learning
The learning process implies repetition which reduces costs by decreasing the time required to perform particular jobs.

3.Process Technology
A particular production method is considered technically superior to another when, for each