Mst.

Shuly Aktar
Associate Professor
Department of Marketing
Begum Rokeya University, Rangpur

Chapter 7
Cost Advantage

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 Cost Advantage
A firm will gain competitive advantage if its growing cost of
performing all value activities is lower than that of
competitors’ costs.
Cost advantage leads to superior performance if the firm
provides an acceptable level of value to the buyer so that its
cost advantage is not nullified by the need to charge a lower
price than competitors.

It is a function of
► The composition of its value chain versus competitors’
► Its relative position vis-à-vis the cost drivers of each
activity.
Determining the relative cost of competitors:
►The first step is to identify competitor value chains and how
they perform activities.
► Where a competitor’s cost can’t be estimated directly, the
firm should employ comparison (between itself and 2the
competitor) techniques
Gaining cost advantage:
Two major ways:-
► Reconfigure the value chain : A firm can adopt a different and
more efficient way to design, produce, distribute, or market the
product.
► Control cost drivers: A firm can gain an advantage with respect
to the cost drivers of value activities representing a significant
proportion of total cost.

Sources of Reconfigure the value chain :

►A different production process
► Differences in automation
► A new distribution channel
► A new raw material
► Direct sales instead of indirect sales
► Major differences in forward and backward vertical integration
► New advertising media
► Shifting the location of facilities relative to suppliers and customers
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► Control cost drivers:
• Controlling scale: Gain the appropriate type of scale, Set policies
to reinforce scale economies where the firm is favored.
• Controlling learning: Manage with learning curve, keeping
learning proprietary, and learning from competitors.
• Controlling the effect of capacity utilization: Level
throughput reduce the penalty of throughput fluctuations.
• Controlling linkage: exploit cost linkage within the value chain,
work with supplier and channels to exploit vertical linkages.
• Controlling interrelationships: Share appropriate activities,
Transfer know-how in managing similar activities.
• Controlling integration: Examine systematically possibilities for
integration and de-integration.
• Controlling timing: Exploit first-mover or late-mover advantages,
Time purchases in business cycle.
• Controlling location: Optimize location
• Controlling institutional factors: do not take institutional
factors (such as government policies and unionization) as a given
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