Cost Leadership Essay

Any organization in set out to extend in a highly competitive merchandise should be able to achieve sustainable growth and profitability. Companies that throw away managed to abase bes and understand the toll technology whoremaster obtain sustainable return as a toll be craper.In order for any participation to vex a appeal leader is serious that the personify technology is silent and the five constituent grades are apply and followed by the management. The five footmark towards obtaining a represent leader advantage are (1) Distinguish between economies of scale, size and image, (2) Increase bonny productivity of labour, (3) mollify wage structure, (4) Control more(prenominal) of the end product be, (5) separate between excess and reserve capacitor. Implementing those steps can buoy take several years (even decades) e.g Canon.A come with has achieved economies of scale when the average terms (AC) declines as outfit increases meaning that the margin al cost of the last whole produced must be less than the average cost. In cases that capacity is constrain then AC cost creases are U shaped and cost crucifys up to the Minimum efficient scale (MES). This is indicated in go steady 1. On the other hand when capacity does non prove to be constrain and each speediness chokes efficient then average cost curves can be L shaped. Even beyond MES average be give not raise. FIGURE 2. So it is essential that companies build up their capacity, expand their plants or build new ones.A confederation has achieved economies of scope when savings are achieved as it increases the variety of products so the total cost of a social club producing two products x and y is less than two companies producing products x and y or TC(Qx,Qy) TC(Qx,0) + TC(0,Qy).Is essential for a partnership to keep variable cost constant and at the same time try to achieve economies of scope. memory costs constant and having economies of scope can lead a company of becoming the cost leader. locomote 2,3,and 4 as mentioned above is very authorized for any company that wishes to reduce costs. Step 2 is guidance in increasing average productivity of the labour e.g. by keeping in the company the nigh productive personnel while boost the least productive to leave the company, while step 3 is focusing in wage normalization e.g. fixed monthly salaries and bonus payments only tie in to increasing productivity. Average variable costs (AVC) has an reverse relation to average productivity (AVC=w/APL) where w is the wage proxy. By increasing productivity and normalizing honorarium (w=1) a company will eventually reduce average variable costs.Step 4 is among the most important in order a company to become a cost leader. This step is focusing in controlling and reducing take costs. step-down take costs is a complicated wreak and some(prenominal) parameters should be taken under good will form the management of any company.Among others, manag ement should plow the complete supply chain process, the degree of steep integration and define their vertical boundaries, decide what products and function will produce in house or subcontract to a supplier, find ways to reduce transactional costs, hedge positions on raw materials, establish dogged term relations and long term contracts with suppliers. Contracts with sub-suppliers supplies should be written in detail and be as accurate as possible including clauses for as more as possible eventualities may occur. Also establishing strategic alliances and join ventures can reduce transaction cost and eventually production costs.Reducing production costs is also related on running the plants as efficient as possible. Reduce inventories to minimum, optimize production lines, improve or even automate communication theory between departments, suppliers and distributors, automating production lines, and reduce fixed costs. really reduction of production costs can be done in every s tep of the production from purchasing raw materials to final shipment of goods. particular proposition analysis and planning of all production steps will provide management with the right schooling and solutions on how production can be optimized and costs can be reduced.Finally in step 5 companies can have the production run into the demand. In this step size is not a constraint, companies have already reserve capacity and operate at the MES point or even on the right side of the MES.. (FIGURE 3) By having reserve capacity and being able to have production moderate the demand companies can influence the demand curve of their products towards being inelastic.Any company that has managed to become the cost leader in its industry will have the ability and should be prepared to allow production determine the demand and have reserve capacity. This will prevent lagging sales and reduce carrying catalogue to minimum.Over the last years more and more companies are focusing on costs, h ow those can be controlled and what measures should be taken in order costs to be reduced. beingness able to reduce costs and in combination with economies in scale (neo authorised model) and economies of scope (game theory) a company can become the cost leader in its industry. It is very important that a company can be the cost leaser in a game and in many cases companies camouflage this advantage so it is not revealed to competitors.Being a cost leader a company can obtain sustainable advantage, will have the capacity to play the game longer and be able to determine the demand curves of their products.