The name of Southwest Airlines in the United States has been closely linked to the "low-cost strategy" when it appeared in media and business textbooks. What is a low-cost strategy, what are its advantages and disadvantages, and how to successfully implement a low-cost strategy? The answer to these questions is obviously not just a case study of the Southwest Airlines case.
The "perfect" of the low-cost strategy itself
The so-called low-cost strategy can be defined as follows: It means that when the same product or service is provided, the company reduces the cost in the fields of research, development, production, sales, service and advertising by strengthening cost control internally. Lower competition, making costs or expenses significantly lower than the industry average or major competitors, thereby winning higher market share or higher profits, becomes a competitive strategy for cost leaders in the industry.
As Southwest Airlines has demonstrated, there are many advantages to successfully implementing a low-cost strategy. The more prominent point is that it has a comparative advantage for competitors in the industry. Because of the low cost of the company, companies can use low price attractiveness to tap sales and market share from competitors, survive in price wars and earn profits above the industry average (based on higher profit margins or The total sales volume is large). If many buyers in the market are sensitive to price and the price competition is fierce, then low cost is a very powerful defense force.
Another significant benefit is that the company's low-cost strategy creates a high barrier to entry for potential new entrants, thereby scaring off potential entrants. The company can adopt a price reduction strategy at any time to make it difficult for a new competitor to win customers. Those enterprises that are not mature in production technology and lack economies of scale in operation are hard to enter the industry.
In addition, the low-cost strategy can also bring competitive advantages to the company, including increased bargaining power for suppliers and buyers, and reduced threats to alternatives.
Of course, the outstanding achievements of Southwest Airlines do not mean that the low-cost strategy it adopts is itself a “perfect†strategy. In fact, low-cost strategies have obvious shortcomings. For example, the upfront investment is large – in general, low-cost companies generally achieve low-cost advantages by expanding production scale, which requires large upfront investment. Companies with insufficient funds are obviously not suitable for adopting this strategy; they are easily competitive. Opponent imitation; new technologies can pose threats, such as competitors using new technologies, or lower labor costs, to form new low-cost advantages; if companies excessively pursue low cost, reduce the quality of products and services, will affect customers The demand will be counterproductive. Another point is that the industry has high barriers to exit. Due to the large investment in the company in the early stage, once the competition is in a disadvantage or the industry begins to decline, the company's exit barriers will be high and the cost will be relatively high.
In fact, the successful implementation of a low-cost strategy requires appropriate internal and external conditions, which is why another American airline, Continental Airlines, has taken a 15-year low-cost strategy.
Three paths to achieving low cost goals
If a company decides to implement a low-cost strategy based on the market environment and its own situation, then it has three paths to achieve low-cost goals: controlling cost drivers, transforming the company's value chain, and fostering a low-cost corporate culture.
Let's take a look at controlling cost drivers. It includes nine aspects:
1 economies of scale or uneconomic. If an activity is carried out, the scale is much lower than the small scale cost, and if the company can allocate certain costs, such as research and development costs, to a larger sales volume, then economies of scale can be obtained.
2 learning and experience curve effects. The cost of conducting an activity may decline over time due to the economics of experience and learning.
3 Input costs of key resources. The management of the cost of a company's outsourcing investment is often a significant cost driver.
4 Coordinate activities that are linked to the company. If the cost of an activity is affected by another activity, then the cost can be reduced by ensuring that the relevant activities are carried out in a coordinated and cooperative manner.
5 The activities of each business unit in the company are shared.
6 integration or outsourcing.
7 Timing factors related to the strengths and weaknesses of the first mover. Sometimes, the first movers in the market can build and maintain their brand reputation at a lower cost than the latecomers. Sometimes, especially when technology is developing very fast, subsequent purchasers of equipment or technology will often benefit, because the equipment installed is second- or third-generation products, the price will be cheaper, and the operation efficiency will be Higher.
8 production capacity utilization. The increase in the utilization rate of production capacity can increase the production of depreciation and other fixed costs, thereby reducing the unit fixed cost.
9 strategic choice and operational decision-making. The following various management decisions can reduce or increase the cost of a company: increase or decrease the number of products and product categories; increase or decrease the services provided to customers; increase or decrease the characteristics of products' performance or quality; pay more than competitors Higher or lower wages and fringe benefits; increase or decrease the number of channels; extend or shorten the delivery time to customers; pay more attention to or not use incentive compensation than competitors; increase or decrease the specifications of purchased materials.
Managers who want to gain low-cost leadership must understand in depth how the nine drivers described above drive the cost of activities in the value chain. For example, although China's labor cost is equivalent to 1/20 of Japan's, why did Canon relocate some of its business from China to Japan in 2003? The main reason is that the use of large-scale fully automated production lines reduces costs and makes the products cheaper. In addition, because of the transportation reasons, Canon's traditional raw materials or parts are provided by Japan, and the two parts assembled or processed in China are shipped back to Japan for sale. This hinders the development speed, so Canon makes strategic adjustments: from China Production to Japan sales changed to Japanese production - Japan sales and China production - China sales, all of which have led Canon to gain a low-cost leading competitive advantage in terms of controlling cost drivers.
How can companies gain cost advantages by transforming the structure of the value chain? The main methods include: 1 simplifying product design, using computer-aided design techniques, reducing parts, standardizing various models and styles of parts, and shifting to "easy to manufacture" design. 2 Reduce the addition of products or services, and provide only basic, no-added products or services, thus reducing the versatility of features and choices. 3 Turn to simpler, less capital-intensive, or simpler, more flexible technology processes (computer-aided design and manufacturing, flexible manufacturing systems that enable low-cost efficiency and product customization). 4 Look for ways to avoid the use of high-cost raw materials and components. 5 Use a sales strategy that “goes directly to the end user†to reduce the cost of the middleman. 6 Relocate facilities to locations closer to suppliers and consumers to reduce inbound and outbound costs. 7 Abandon the “customized marketing†approach and focus on a limited product or service to eliminate the activities and costs of various changes in the product or service. 8 Reengineer and update business processes to unify and combine some work steps to remove activities with low added value. 9 Use electronic communication technology to reduce pen work, reduce printing and copying costs, speed up communication via e-mail, reduce travel costs through video conferencing, disseminate information through the company's internal network, and connect with customers through web sites and web pages.
For example, Dell Computer Corporation is a pioneer in transforming the manufacturing and marketing value chain of personal computers. Prior to Dell, the vast majority of PC manufacturers were mass-produced and then sold through independent dealers and distributors. However, Dell Computer Inc. sells the product directly to the customer. Once the customer places an order, the company produces the product on the order and ships the product to the customer within a few days of receiving the order. It turns out that Dell's value chain approach is very "in a fleeting" lifecycle of products in the computer industry (almost a few months with models with faster chips and new features). Cost effectiveness. Dell's order-to-order strategy allows Dell to avoid erroneously judging the needs of the company's various models, thereby avoiding the need for outdated parts and finished goods inventory; at the same time, its direct sales strategy will be a special dealer The costs and profits of the distributors are removed from the value chain.
In addition, companies that implement low-cost strategies should focus on developing a low-cost corporate culture. A porridge and a meal, often thinking hard to come; a glimpse of a glimpse, constant thinking material strength; decimals are afraid of addition, large numbers are afraid of reduction and so on. Implementing similar concepts into employees and forming shared values ​​for employees will have more ways to reduce costs. For example, copy paper is used on both sides, like using water and electricity in your own home, and the water is used twice before entering the sewer. If the low-cost concept becomes the mind of every employee, there will be a variety of low-cost behaviors that will give the company a longer-lasting cost advantage over its competitors.
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