cost leadership
TRANSCRIPT
Release cash Reduce cost Manage risk Improve ROI
T: +44 (0)20 7605 1600 E: [email protected] W: www.4cassociates.com
With the global economic crisis showing few signs of dissipating, effective costtransformation is increasingly important for businesses looking to do well.
Cost Leadership andEconomic Uncertainty
Cost LeadershipIn his 1985 book, “Competitive Advantage: Creatingand Sustaining Superior Performance”, Michael Porteridentifies three generic business strategies. Theseapproaches can be applied to products or servicesacross all industries, and in companies of varying sizes.One of these, “Cost Leadership”, is a strategy basedon being the lowest cost producer in an industry, for acertain quality of product.
A leading company will either sell products at averageindustry prices to earn more margin than itscompetitors or sell at below industry prices to gainmore market share. A cost effective business shouldalso be able to weather any resulting price war whilstremaining profitable.
Businesses Doing it RightA number of companies have been able to grow theirmargins despite the economic climate. One example isWhitbread. The UK based organisation, which ownspopular brands such as Costa Coffee and Premier Inn,has demonstrated that there is potential to do wellduring a recession. By offering relatively inexpensivefood and hotel prices, the group has managed tocontinue its expansion and raise its share value bymore than a quarter in the past year.
Whitbread has effectively implemented the right
model at the right time and taken advantage of thecurrent demand for less expensive hotel and diningexperiences. In order to provide these services in a costeffective manner, Whitbread has focused onimproving procurement practices, menu managementand labour scheduling.
A key element of this strategy was the launch ofseveral ‘Skill Academies’, which provide training formanagers and team members in improvingoperational and cost efficiencies. Another example ofWhitbread’s cost leadership approach is the company’suse of e-auctions to minimise the impact of risingcommodity prices. The process allowed Whitbread toavoid paying a 16 per cent price hike for a keycommodity – potatoes. This approach saves thecompany an estimated £400,000 per year.
Successful Cost Leadership Initiatives4C Associates is currently driving a variety ofinnovative cost transformation projects for severalclients. The most recent is Project Flow, a NetworkOptimisation initiative being carried out to reduceempty miles and increase efficiency within the clients’supply chain. CAST modelling tool was used to gatherall relevant data on ingoing and outgoing transportflows from client factories and distribution centres.Geo-mapping techniques were then used to matchoutbound customer deliveries with inbound raw
Release cash Reduce cost Manage risk Improve ROI
T: +44 (0)20 7605 1600 E: [email protected] W: www.4cassociates.com
4C Associates has the insight, technology andexperience to drive rapid profit improvement.We offer specialist consulting, technology andmanaged services to transform your costs. Weapply industry and functional expertise to deliverexceptional benefits.
Our team works with leading organisations across arange of cost categories including Direct Materials,Services, Marketing, IT, HR, Logistics, SupplyChain, Property and FM. We apply deep practicalknowledge, combined with process and changeskills, to deliver reduced costs and increased profits.
To discuss how we can transform your costs pleasecontact us at:
Tel: 0207 605 1600Web: www.4cassociates.comEmail: [email protected]
material deliveries in order to leverage the benefits ofround trip pricing. Initial savings of 18 per cent wereachieved on transportation costs.
Another 4C project, “Bondi”, is a broad brush costreduction and cash release exercise across allcategories, all geographies and all suppliers withspend over £100k. Suppliers were further segmentedby their effective impact to business in case of non-supply. Different negotiation strategies were thenadopted for each different segment. The projectentailed requesting a 4.7 per cent price decrease andharmonisation of payment terms towards the 75 daysstandard (excluding small businesses).
Driving InnovationOne of the key elements behind a successful costleadership strategy is fostering a mentality whichencourages innovation. The best way to reduceexpenditure is to look at cost from a different angle.An example of this is a driving school which employsone brand of car. By supplying cars to the motoringschool, the vehicle manufacturer is effectivelyadvertising its products to every learner driver usingthe school. In this situation which party should becompensating the other?
The airline industry has long been striking profitabledeals with airports to keep certain routes open.Ryanair in particular has championed the notion oflooking at costs in an innovative manner. The Irishairline’s business strategy was pioneered by SouthwestAirlines and made up of four guiding principles:employ a single type of plane to keep costs down,constantly review overheads, turn aircrafts around asquickly as possible and abandon point’s schemes.
In 2002, Ryanair secured a significant discount on thepurchase of 100 Boeing 737-800 jets with the optionto buy a further 50. With newer, more fuel efficientplanes than many of its rivals, Ryanair was able tocharge lower fares and fill planes with passengers,who might not spend a huge amount on tickets butspend profitable sums on food and hotel reservations.
Ryanair has introduced a number of measures whichhelped the business to a profit of €503m in the pastfinancial year. These include, being the first airline toimplement baggage charges, working to eliminate theneed for check in desks and cutting the weight of itsaircrafts. Most recently the company announced it wasexamining the possibility of larger aircraft doors, tospeed up boarding. In a similar vein, rival airlineEasyjet, is to introduce allocated seating in an attemptto secure revenue from having passengers pay tochoose their seats. This consistent search for new waysto transform costs, is the essence of the costleadership strategy.
Seeking out OpportunityDespite the lack of optimism surrounding the currentfinancial climate, several of the world’s leadingbusinesses have been able to thrive. The difficultenvironment, in which many companies are evolving,represents a great opportunity to review, improve andrevolutionise established industry practices. Byadopting a new way of approaching cost, businessescan leverage innovative cost leadership practices todrive growth.
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