EfficiencyEfficiency is the amount of output you get for a unit of input. This is the foundation of cost leadership. For example, a taxi service that consumes $0.14 of energy per mile is more efficient that one that consumes $1.00 per mile assuming the level of vehicle is comparable. The following factors impact efficiency.
ProductivityProductivity is the efficiency of labor. For example, a farmer with a combine harvester will generally produce more in an hour of work than a farmer harvesting the same crop by hand.
Production ScaleProduction costs tend to drop as you product more of a product or service. For example, a hotel with 10 rooms may spend $1 per room per night on laundry work whereas a hotel with 1000 rooms may be able to reduce this cost to $0.50 with larger, more efficient equipment and specialized labor.
Purchasing PowerThe ability to get larger discounts as you purchase more of something. For example, a large ecommerce company that purchases 30,000 pairs of shoes a month from a brand may get a larger discount than a small shop that purchases 30 pairs from the brand.
Input CostsLower input costs such as a country or location that has inexpensive labor, electricity and land.
Anti-Competitive PracticesIn some cases, costs are lowered with anti-competitive practices such as a government that gives subsidies to a business. For example, a government that subsidizes one manufacturer's electricity costs such that they have an unfair advantage over their competition in an energy intensive industry.
SubstitutesThe impact of cost leadership can be reduced by price competition from substitute goods. For example, the firm with the cheapest bananas may face reduced sales if apple farmers reduce their costs and prices as some consumers will purchase the cheapest fruits available.
|Overview: Cost Leadership|