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Only In Greenland They Quietly Chew Gum Leaves Every Christmas
Another significant influence on the operations management function arises from the actions of competitors and the way such competitors price their products.
Define: Cost-based competition is derived from determining break-even point (the level at which the firm matches total costs and total revenue) and then applying strategies to create cost advantages over competitors.
The competition
The competition
If a competitor lowers prices, management must find ways to ensure that the business can either lower its prices or improve the quality of its products enough to encourage customers to continue buying their good/service.
Cost-based competition is a feature of operations management when businesses bring a cost leadership approach to the operations function. That is, they focus on reducing costs to a minimum while maintaining profit margins.
The business will need to identify how to reduce both fixed and variable costs
Fixed
Fixed
fixed costs are those that not dependent on the level of operating activity in a business. Fixed costs do not change when the level of activity changes — they must be paid regardless of what happens in the business.
Variable
Variable
variable costs are those that vary in direct relationship to the levels of operating activity or production. Such costs include labour costs and costs of energy.
This could involve finding cheaper inputs, improving efficiency, outsourcing, achieve economies of scale by producing high volume output or cutting back on the range of products offered.
Case Study Example
Case Study Example
ALDI
The entry of ALDI into the Australian Grocery retail market in 2002 cause Coles and Woolworths to refocus on costs to determine if they could reduce costs in operations to better compete with an increase in cost-based competition.
Aldi’s cost strategies include.…
Easy-to-stock cookie-cutter stores
Shelf-ready packaging which can be wheeled into place rather than unpacked by hand
Just-in-time distribution model
Employing only a handful of staff in each store
Limiting the number of stock-keeping units to one or two
How did Coles and Woolworths respond?
Case Study Example
Case Study Example
IKEA
IKEA wants to produce products and sell them “at prices so low that as many people as possible will be able to afford them”
IKEA aims to price products at least 20% below competitors with an ultimate goal of 50% below.
How do they achieve this? (cost-leadership) Business the reduce costs focus on:
Achieving economies of scale
Bulk Buy Inputs
Eliminate wastage
Products are standardised for larger markets
Produce high volume output
Use automated production systems
Who are IKEA’s competitors in Australia?
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