Cost Leadership Strategy

CHAPTER I INTRODUCTIO N A. Background Each company has its own efforts to achieve a competitive advantage that is different from one company to another. One strategy that can be carried out by companies as an effort to increase business in increasingly fierce business competition in order to achieve and maintain a competitive advantage is to implement a Cost Leadership strategy. Cost Leadership is a company strategy by minimizing costs so that the costs incurred will be lower than companies that use Differentation or Focus Strategies. By implementing a Cost Leadership Strategy, the company will get greater profits because the company can reduce production costs so that prices can compete and company profits can increase. The application of the Cost Leadership Strategy can improve company performance with strict cost control, one of the efforts that can be made is to minimize costs in all aspects of the business. On the other hand, the application of the Cost Leadership Strategy in the company has several disadvantages, namely being vulnerable to several risks such as the emergence of new competitors with imitation products that have lower selling prices, lack of attention to customer needs and satisfaction due to excessive concern for minimizing costs. In addition, unexpected inflation can also make companies that implement Cost Leadership Strategies unable to compete with companies that implement Differentation Strategies. Based on the description above, it can be concluded that the application of the Cost Leadership Strategy can improve company performance, but has several risks or weaknesses that can make the company unable to maintain excellence in competitive competition. Therefore, The company must be able to minimize risks so that the company maintain a competitive advantage. B. Problem Formulation 1. What is Cost Leadership? 2. How to gain a cost advantage? 3. What are the risks of a cost leadership strategy? 4. What are the benefits of implementing a cost leadership strategy? 5. What is a differentiation strategy? 6. What are the advantages of competition? 7. What is a cost leadership strategy? 8. What are the benefits of implementing cost leadership? 9. What is an example of implementing a differentiation strategy in a company? 10. How to apply the strategy CostLeadership a company? C. Objectives and Benefits 1. Understand the definition of Cost Leadership 2. Know how to obtain cost advantages 3. Know the risks of cost leadership strategy 4. Know the benefits of implementing a cost leadership strategy 5. Understand the definition of differentiation strategy 6. Knowing the advantages of competition 7. Understand cost leadership strategies 8. Know the benefits of implementing cost leadership 9. Understand how to implement a differentiation strategy in a company 10. Understand how to implement a cost leadership strategy in a company at CHAPTER II DISCUSSION A. Cost Leadership Concept There are 3 common strategies that companies tend to use as a struggle to develop their business in intense competition to achieve and maintain competitive advantage. Michael R. Potter in Ritika Tanwar (2013) mentions these three strategies as differentiation, cost leadership, and focus strategies. Cost Leadership is a strategy where by reducing costs so that output costs will be lower than companies that implement differentiation and focus strategies. Cost Leadership is a key organizational tool used in improving industry performance and promoting competitive advantage (Azim, Abdullah, & Gorondutse, 2017). Therefore, cost leadership is an influential factor that can lead to active company performance. Similarly, market orientation has been identified as a catalyst for improving effective business performance by considering customer needs as the top organizational philosophy (Hassan et al., 2018). Therefore, it is important to propose that cost leadership and market orientation have an influence in creating competitive advantage and improving organizational performance (Waddel & Stewart, 2008). Because one of the important elements of success in the market is competitive advantage ((Birjandi, Jahromi, Darabi, & Birjandi, 2014). For an organization to function actively, it must be familiar with its field of operation. Therefore, all components of the company's performance must be expected, controlled, evaluated, and consolidated in top-level decision making. In addition to cost leadership and market orientation in influencing performance, differentiation strategy can also affect organizational performance (Abu Aliqah, 2012). According to Porter's theory to build competitive advantage is usually through cost leadership and differentiation strategy, usually companies choose only one of these two (Kharub, Patle, & Sharma, 2016). Porter mentioned that companies that emphasize cost leadership create efficient scale facilities, emphasize reducing expenses and minimize R&D, sales force, advertising and overhead costs. With cost leadership, companies can gain a competitive advantage over their competitors simply by having a higher return on assets and by producing products with reasonable quality (Kharub, Mor, & Sharma, 2018). Cost leadership has a significant relationship with company performance. It enables them to achieve and maintain their desired goals for a considerable period. Under most conditions, a firm that achieves a significant level of product quality gains a high proportion of market share and enjoys the benefits of increased sales growth. In addition, the total unit cost of manufacturing and distribution parts tends to decrease at a more or less uniform rate with each percentage increase in the firm's cumulative output. Cost leadership strategies receive wider scholarly attention in many management and marketing literatures. Similarly, (Gonzalez- Benito & Suarez- Gonzalez, 2010) investigated one hundred and forty-eight Spanish manufacturers and reported that the alignment between business strategy (in this case cost leadership), manufacturing objectives as well as manufacturing capabilities positively influenced business performance. (Acquaah, 2011) study examined the effect of business strategy on family business performance. A sample of fifty-four family businesses was used. The results of this study indicate that the business strategies of cost leadership and differentiation generate competitive advantage for family businesses. In the same vein, (Valipour, Birjandi, & Honarbakhsh, 2012) argued about the effect of cost leadership strategy and product differentiation strategy on firm performance. Data was collected from forty-five companies in Tehran Security Exchange (TSE), multiple regression analysis was used for cost leadership and firm performance. a) How to Gain Cost Advantage How to obtain cost advantage To obtain cost advantage, the company's cumulative costs through the value chain must be lower than its competitors. There are several cost drivers that must be controlled as follows: 1) Economies of scale. Increased volumes can be less costly than smaller volumes as research and development and marketing costs can be shared with larger sales volumes. 2) Learning from Experience. Experience in streamlining work, comparative studies to companies with similar activities. Management's concern is not only to make a profit, but also to use it to modify production. 3) Cost of Input Resources. There are several factors that are key to obtaining cheap input resources. Namely by using bargaining power by buying in bulk to get the best price from suppliers. 4) Cooperate with Value Chain Activities in the Company or Industry. Raw material storage costs can be minimized by networking with suppliers, thereby reducing operating costs. 5) Sharing opportunities with other business units in the organization. This can be done with various ordering processes, customer billing systems, distribution facilities. A potential weakness of a cost leadership strategy is the tendency to cut costs that could undermine demand for the product or service, for example by eliminating important models. A cost leadership strategy will remain competitive only if customers perceive that the product or service is equal (at least close) to the competitor's higher priced product. A cost leadership strategy implemented under the right conditions can be a powerful weapon. b) Risk of cost leadership strategy • The cost leader's manufacturing equipment may become using due to its competitors' technological innovations, these innovations allow its competitors to produce at a lower cost level than the cost leader. • Too much focus on price reduction can make companies pay less attention to customer needs or issues related to other dimensions of competition. • Cost leadership strategies are related to imitation (copying) sometimes competitors learn how to imitate cost leadership strategies successfully. When this happens, the cost leader must find ways to increase the value of the goods or services it offers to customers. c) Advantages for companies in implementing a cost leadership strategy 1) Low-cost companies can earn above-average revenues despite strong competitors in the market. 2) The cost leadership strategy also protects the company from strong buyers. With low costs, buyers can no longer force the company to reduce costs. 3) The position as a cost-based market leader also gives the company the flexibility to work with suppliers. 4) It also provides a high barrier to entry for the company's competitors especially in cost advantages and creation of economies of scale products. B. Strategy Differences A differentiation strategy is an integrated set of actions taken to produce goods or services (at an acceptable cost) that customers find different in ways that matter to the firm. Differentiation strategy is divided into several dimensions, including product differentiation, marketing differentiation, differentiation, service differentiation, and service differentiation. quality innovation differentiation strategy. It is possible that a firm may fail in the middle in choosing the most appropriate generic strategy. To avoid such generic strategy inconsistencies, a firm may consider combining, hybridizing, or combining these generic strategies based on the firm's resources, capabilities, and strategic choices (Espinorodríguez & Chun, 2014). The objective of pursuing a differentiation strategy is to offer a unique product or service to customers thereby earning a premium price. This facilitates the firm's erection of entry barriers and reduces the bargaining power of buyers through customer loyalty and price inelasticity (Porter, 1980). In other words, by applying differentiated special services or personalized products, firms can build customer loyalty when substitute products or services are not available in the market. The characteristics of products and services in this industry allow companies to charge their customers higher prices than their competitors based on the costs of delivery systems, service quality, and distribution channels involved in creating or producing their unique products and services. Miller in (Lo, 2012) further categorizes differentiation strategies into product-innovation differentiation and market differentiation. In a product-innovation differentiation strategy, a company aims to outperform its competitors by emphasizing the production of creative, cuttingedge, and attractive products, as well as service quality, efficiency, new product development, design innovation, and fashion or style. Differentiation strategies are all-encompassing in a market economy and are the prevailing way to gain competitive advantage (Hingley, Sodano, & Lindgreen, 2008; Pehrsson, 2016). The literature in strategic management provides several classifications of business strategies that explain how firms compete in the relevant market environment. Porter's differentiation strategy gives businesses the opportunity to declare the best price in addition to maintaining a better market share or becoming a market leader. Differentiation strategy as a part of business level strategy is executed resourcefully when the business gives exclusive or more significance to the business. to buyers in the direction of product quality, features, or follow-up support. Therefore, businesses that adopt a differentiation strategy may charge more for goods or services based on features, allocation systems, service quality, or delivery channels. C. Competitive Advantage Bharadwaj et al. (1993: 83-84), explain that the superiority of a competition is the result of implementing a strategy that utilizes various resources owned by a company. Special and unique assets are seen as a source of competitive advantage. Unique specialty is the ability of a company to include its employees as an important part of achieving an advantage in a competition. A company's ability to perfectly develop the skills of its employees will allow them to occupy the top spot in the game as their human capital-based strategy will be more difficult for other companies to replicate. Meanwhile, unique assets or resources are the real resources needed by the company to carry out its competitive strategy. A similar statement was also made by Porter (1990), that competitive advantage is the center of a company's performance to face competition directly. Competitive advantage can be defined as a profitable strategy for companies that cooperate to create more effective competitive benefits. This strategy must be designed to create sustainable benefits so that the company can dominate in both old and new markets. Competitive advantage basically grows from the value or benefits that companies can create for their consumers. Generally, buyers tend to choose products that deliver more value than what they need. Even so, the value will be compared with the accompanying price. Purchases will occur if the benefits and prices provided are balanced with each other. This is supported by Styagraha (1994: 14), Some of the indicators used to measure these advantages are uniqueness, rarity, difficult to copy, difficult to exchange, and competitive prices. The uniqueness of a product is a distinctive feature of a product that combines aesthetic value and buyer taste. Competitive price is the company's ability to adjust the price of its products to the general price in the market. Rarity means that the existence of the product is difficult to obtain in the current competition. Harder to copy means that other competitors may be able to copy the product but not with the same quality. Harder to exchange means that not many similar products exist that can be substituted. D. Cost Leadership Strategy Hitt et al. (2001: p. 155) suggests that cost leadership strategy is a set of integrated actions designed to produce or deliver goods or services at a relatively low cost level compared to competitors with product characteristics that are acceptable to customers. Another definition put forward by Charles & Gareth R. (1998: 17) that as a company goal cost leadership or low cost strategy is to do everything that can produce goods or services at a lower cost level than competitors. There are other expert opinions regarding cost leadership strategies, namely from Pearce II and Robinson Jr. (2000) who argue that a company can successfully build a cost leadership strategy if it can provide its products or services at a cost level below what competitors provide, and it must achieve sustainable competitive advantage. Mudrajad Kuncoro (2005: 90) argues that, cost leadership strategy is a strategy used by the organization if the organization wants to become a low cost-based market leader with a broad customer base. Based on this statement, it can be said that cost leadership is one of the generic strategies that uses ways or methods that can create cheaper product or service costs than competitors. A cost leadership strategy is a set of integrated actions taken to produce goods or services at an acceptable price. by customers at the lowest cost when compared to competitors. Companies using a cost leadership strategy typically sell standardized goods or services to the industry's most typical customers. Process innovation, which are newly designed production and distribution methods and techniques that allow a company to operate more efficiently, is critical to the successful use of a cost leadership strategy. This strategy enables the company to withstand price competition and even become a market leader in determining prices and ensuring high (above average) and stable market profit levels through aggressive ways of efficiency and cost effectiveness. To be able to implement a low-cost strategy, a company must be able to meet requirements in two areas, namely resources and organization. This strategy is only possible if the company has several advantages in the field of resources, namely strong capital, skilled in process engineering, strict supervision, easy to produce, and low distribution and promotion costs. While from the organizational field, the company must have: the ability to strictly control costs, good control information, incentives based on targets (allocation of results-based incentives). (Umar, 1999). A cost leadership strategy works well when buyers are highly sensitive to price changes, when competing firms sell products of the same commodity, and when firms can take advantage of economies of scale. The leader in cost is not only in the most favorable position to protect itself from price wars, but can also use its power to attack competitors with the cheapest prices in that industry (Arif Yusuf, 2016, p. 126). A cost leadership strategy based on certain qualities implements a cost leadership strategy, through improving efficiency and utilizing external situations. There are 3 value benefits generated in implementing cost leadership: a) Benefit parity, where the company produces products that produce the same benefits or quality, but with cost leadership, as the company achieves economies of scale. b) Benefit proximity, where the company produces slightly lower benefits/quality, but at a lower cost, due to the use of automation or cheaper labor, and cheaper raw materials. c) Produce products that are of different or lower quality compared to their competitors' products but at a lower cost. Companies that are able to make products at a lower cost and sell them at a price that can provide greater profits than competitors, then the company is in a better position, namely: a) Allows the company to survive in a price war competition situation and deter competitors with higher costs from waging a price war (to survive the price war, attack from the price angle, enjoy high profits). b) Higher profits can be invested to improve quality and efficiency. c) The possibility of generating economies of scale, but many companies do not take advantage of it (due to limited capital, information, etc.). d) Increases in raw materials from suppliers can be mitigated by cost advantages. The cost leadership strategy is an economy of scale, which is the goal of achieving a minimum measure of efficiency between input-output relationships, and high quality products. The cost leadership strategy is measured using indicators, offering lower prices than competitors, controlling general costs carried out by the company, the company is able to optimize existing human resources to be able to work effectively and efficiently and suppress the cost of raw materials carried out by the company. E. Example of Differentiation Strategy and Cost Leadership Strategy Implementation in a Company The examples of differentiation strategies and cost leadership strategies are taken from a journal entitled "Competitive Advantage Strategies for the Performance of Tasikmalaya Embroidery Creative Industries" compiled by Lina marlina et al, in 2020. In this journal it is said that the differentiation strategy carried out by border companies has shown strong numbers. Based on the statistical results, the differentiation strategy has an effect on performance. This can be caused because the uniqueness of Embroidery returns to the creativity and innovation of entrepreneurs and designers. In fostering creativity, the designers work earnestly so as to produce customer satisfaction which makes more and more demand. In addition, quality control standards are maintained because they are related to customer trust and the quality of the selling price. Service to consumers can also continue to be improved with punctuality and product suitability with customer messages. Embroidery SME entrepreneurs have been able to utilize social media and technology in dealing with the problem of speed of customer response. Finally, the differentiation strategy carried out by Embroidery SMEs can improve performance. High performance will be able to contribute profits to the company (Buli Mamo: 2017, pp 23-27). For the second strategy, cost leadership, the low cost offered focuses on specific product quality. Local markets with price-sensitive customers will find it easier to use this strategy. The creative industry of Embroidery SMEs must analyze that the local economic level of the majority of Tasikmalaya people is at the middle level. The low cost of a product is obtained through the efficiency of production operations with quality management. Low operational costs and proactive management are considered to be able to increase competitiveness with a cost leadership strategy. The cost leadership strategy or lower prices than competitors is carried out by Embroidery entrepreneurs by controlling and suppressing raw material costs. Embroidery entrepreneurs combine low prices with optimization of human resources so that the output is more and workers become more productive. productive. In addition, cost leadership for the domestic market is very appropriate because it is in accordance with the economic level of the community, with quality and competitive prices, the performance of Embroidery SMEs in Tasikmalaya City has finally increased. CHAPTE R III CLOSUR E A. Conclusion Cost Leadership is one of the tools in the organization that is tasked with managing strategies by reducing costs so that output costs will be lower than companies that implement differentiation and focus strategies. Because Cost Leadership creates efficient scale facilities, emphasizes reducing expenses and minimizing R&D, sales force, advertising and overhead costs. And by applying this cost leadership the company can gain a competitive advantage. Which is characterized by special and unique assets. The purpose of the organization using this cost leadership is to do everything that can produce goods or services at a lower cost level than competitors. So that the advantage is still on the side of the organization. B. Advice From the discussion of the material above, the authors suggest that readers study more deeply about the theory and concept of cost leadership implementation by reading other sources such as books, journals, papers, essays and others in order to better understand the concept of cost leadership because the more references you read, the more you will know the differences from each reference discussing cost leadership. LITERATURE Azim, S., Abdullah, H. H., & Gorondutse, A. H. (2017). Competitive Strategy and Firm Performance: A Review of Literature. International Journal of Business and Technopreneurship, 7(1), 87-92. Edward J. Blocher. (2000). Cost Management with Strategic Pressures. Jakarta: Fourth Edition. Hamali, Arif Yusuf. (2016). Understanding Business Strategy and Entrepreneurship. Jakarta: Prenadamedia Group. Hassan, A. et al. (2018). Cost Leadership, Market Orientation and Business Performance: An Empirical Investigation. Journal of Quantitative Methods, 2(2). Hill, Charles W.L., and Jones Gareth R. 1998.Strategic management Theory: An Integrated Approach. Fourth Edition, Houghton Mifflin, Boston. Hit, Michael A., R. Dane Ireland E. Hoskisson, 2001. Strategic Management: Competitiveness and Globalization, Concept Book 1, 4th edition translated by Risa Rimendi Salemba 4 Jakarta. Kharub, M., Patle, B. K., & Sharma, G. (2016). The Relationship between Differentiation Strategy and Firm Performance: a Mediating Role of Quality Management. IOSR Journal of Mechanical and Civil Engineering (IOSR-JMCE), (2278-1684, pISSN: 2320-334X), 66-71. Mubarok, M. Husni. (2009). Strategy Management. Kudus: Stain. Mudrajad, Kuncoro. 2005. Strategy How to Achieve Competitive Advantage. Erlangga: JakartaPearce II and Robinson J. Riacard. 2000. Strategic Management Formulation, Implementation, and Control. 7th Edition. McGraw-Hill. Purwianti, Lily. (2017). Analysis of the Effect of Cost Leadership, Differentation Strategy and Market Orientation on Company Performance. Batam: Batam International University. Waddel, D., & Stewart, D. (2008). Knowledge management as perceived by quality practitioners. The TQM journal, 20(1), 31-44. The TQM Journal, 20(1), 31-44. Husein Umar. 1999. Human Resource Research in Organizations. PT Gramedia Pustaka Utama: Jakarta. Lina Marlina, et al. (2020). Competitive Advantage Strategy on the Performance of Tasikmalaya Embroidery Creative Industry. [Journal]. Co-Management. Vol 3(1): 427-430. [Online]. Competitive Advantage Strategy on the Performance of Tasikmalaya Embroidery Creative Industry | Journal of Co Management (ikopin.ac.id).