The key to the success of the cost leadership strategy lies in the company’s long-term adherence to the strategy and the skills to implement it. Costs will not fall automatically or accidentally. Cost reduction is the result of hard work and perseverance. Companies have different abilities to reduce costs, even when they have similar technology and equipment, similar scale, similar production capacity, and similar policy guidance. The following are the main issues that companies often ignore when implementing a cost leadership competitive strategy.
(1) Ignoring operating costs. When it comes to “cost”, most managers will naturally think of production. However, a considerable part of the total cost is also generated by activities such as marketing, promotion, and service, which are the company’s operating costs. As companies pay more attention to marketing activities, the proportion of operating costs in the company’s total costs is getting higher and higher, even exceeding the production cost of products, but it is often rarely taken seriously in cost analysis.
(2) Ignoring the cost of the procurement link. In the product cost, the cost of raw materials generally accounts for a higher proportion, which directly affects the company’s cost. Many companies ignore reducing costs through the procurement link. These companies often regard procurement as a secondary auxiliary function and pay little attention to it in terms of management. At the same time, the procurement department often focuses too much on the procurement of key raw materials. The connection between procurement input and cost is not recognized and valued by the company. For many companies, a slight change in procurement methods will produce obvious cost benefits.
(3) Ignoring the costs of indirect or small-scale activities. Cost reduction plans usually focus on large-scale cost activities and direct activities. Activities that account for a smaller part of the total cost are currently difficult to get enough attention from many companies. Some indirect activities such as maintenance and daily expenses are often not taken seriously by companies.
(4) Contradictions in cost reduction. Companies often try to reduce costs in contradictory ways. They try to increase market share and benefit from economies of scale, but offset economies of scale through product diversification. For example, some companies set up factories close to customers to save transportation costs, but purchase key raw materials in distant places. Factors affecting costs are sometimes contradictory, and companies must seriously consider the trade-offs between various factors.
(5) The trade-off between cost leadership and product characteristics. If the company’s products appear to customers as distinctive products, then this must be fully considered when implementing a cost leadership strategy. At certain times, cost reduction may affect the product’s characteristics. Therefore, when making decisions, companies must carefully consider whether they need to reduce costs or keep their products distinctive.
(6) Ignoring new models for cost management. Companies often focus on reducing costs under existing conditions, but ignore the use of innovative models to reduce costs. For example, some Japanese electronics companies do not use traditional division of labor assembly line manufacturing, but rather work groups composed of employees from different links of the product to jointly produce products. Facts have proved that their production efficiency is higher than ordinary assembly line operations, and it is not easy to make employees feel disgusted.