Companies that compete on cost work tirelessly to eliminate all unnecessary expenses. In the past, companies in this category have standardized products for major markets. They have increased profits by stabilizing the production process, strengthening productivity standards, and investing in automation.
Today, the entire cost structure is examined not only in terms of direct labor costs, but also in terms of reduction potential. High-volume production and automation may or may not offer the most cost-effective alternative.
An example is Lincoln Electric, a manufacturer that has been reducing costs by $10 million a year for 10 years. Skilled machine operators working on a strict piece rate system earned about $80,000 per year. They produced their own materials, maintained and repaired these materials themselves, and controlled their quality themselves. These workers, called “million-dollar men,” have saved the company’s millions of dollars to spend on automated equipment.
Southwest Airlines’ strategy of low cost and controlled growth is backed by carefully designed service, efficient operations and dedicated staff.
Southwest uses only one type of aircraft, the Boeing 737, to facilitate crew changes, organize training, enroll, maintain, and cost inventory. The flight time between flights is 15 minutes. All flights are non-stop as flights are limited to close routes (1 hour only). This means that there is no baggage transfer and no food is served. There are no allocated seats and boarding passes have not been issued. Passengers show their IDs at the entrance; checked in the reservation list; They issue plastic boarding passes that can be reused by the airport. Southwest also saves $30 million a year in travel agency commissions by customers contacting airlines directly and booking flights. The airline in question selects its employees very carefully and reinforces its commitments with a model profit-sharing plan. Is it the result? Southwest has the lowest cost per passenger mile and the highest number of passengers per employee in the industry, as well as the most timely departures and the fewest complaints about misdirected baggage.
Companies that compete successfully on cost have realized that lower cost cannot be considered a competitive advantage if increases in productivity are only achieved through short-term cost reductions. The long-term productivity “portfolio” needs to be able to balance current costs with future reductions in production costs. The said portfolio includes investments in up-to-date facilities and infrastructures; equipment, program and system to facilitate production; It includes training and development activities to increase skills and employee capacity.
Many companies approach quality in a defensive and reactive manner. Quality is related to minimizing defect rates and conforming to design descriptions. In order to compete on quality, companies use quality not only as a way to avoid problems and reduce rework costs; they should see quality as an opportunity for the customer to be satisfied.
For customer satisfaction, first of all, the customer’s attitude and quality expectation should be understood.
The American Customer Satisfaction Index, compiled annually by the American Association for Quality Control and the National Center for Quality Research, is a good example. Examining the Malcolm Baldrige National Quality Awards and the criteria on which the award is based also provides insight into companies competing in quality.
The Ritz-Carlton Hospitality Company is both a Baldrige Award winner and a respected symbol of quality. The entire service system is designed to grasp the personal expectations of customers in order to satisfy more than 500,000 customers. Each employee has the authority to meet customer requests and take measures to solve problems. The processes are uniform and well defined. Working teams at all levels set goals and devise quality action plans. Each hotel is a quality leader, the resource and advocate responsible for the implementation and development of these plans. Measurements such as guest room preventive maintenance time, check-in rate without waiting, time taken to create the best clean room shape in the industry are followed by daily quality reports sent by the 720 working system. Each employee prepares a Guest Incident Activity Report in order to identify the problem types and to find solutions to these problems continuously. Guest Reference Reports are received from sophisticated customers about the service provided by the business.
E.g; If a guest staying at the Ritz Atlanta likes to eat fruit and read 5 different newspapers every day, this request is recorded in the hotel’s database and this expectation is automatically fulfilled the next time the person stays at the Ritz Naples or Ritz Hong Kong. The Ritz-Carlton offers an exceptional quality of service to one customer at a time.
Marketing is always looking for variety to offer its customers. On the contrary, production is resisting this trend. Because diversity will hinder the continuity (and speed) of a production system and increase costs. The production movement towards diversity has created a new field of competition. Flexibility has become a competitive weapon. It encompasses the act of providing a broad product line, introducing new products and rapidly transforming existing ones into new products and responding to customer demands. Companies like Andersen Windows, Custom Foot Shoe Store, and National Bicycle are examples of companies competing for flexibility.
Like many manufacturers, Andersen Windows produced a limited number of standard product lines in high volumes. Andersen started adding more and more options to standard windows, as customers demanded something unique. Thus, the number of products increased from 28,000 to 86,000. Bold catalogs have allowed customers to combine highly unique windows with thousands of options. However, calculating the price quota that requires trigonometry took some time and took about 15 pages.
Speed has long been a source of competitive advantages. Internet customers are conditioned to fast response and product delivery. Service businesses like McDonald’s, LensCrafters, and Federal Express are always competing for speed. Citicorp advertises real estate mortgage approval in 15 minutes; L.L.Bean ships the goods the day they receive the order; WalMart also restocks twice a week instead of the standard every 2 weeks.
Today, manufacturers are discovering the advantages of time-based competition with make-to-order and efficient supply chains.
Firm Gap can’t predict how young people will dress better than other retailers, but when styles and colors are “in vogue,” they can act quickly and offer them more choice. Gap’s core competency in purchasing, logistics and supply chains ensures that more than 20 lines of the company come to the fore in the new season rather than the old season.
In the clothing sector, Saks Fifth Avenue has terminals of the French National Videotext system that connects manufacturers and retailers abroad. Tailors in New York send suit measurements by satellite to France, where the suit is laser cut and the tailor begins to work. It takes 10 weeks to make a standard suit.
Hewlett-Packard manufactures electronic experimental equipment in 5 days, which previously took 4 weeks to produce. General Electric, switch box production time from 3 weeks to 3 days; It has reduced the dishwasher production time from 6 days to 18 hours. Dell ships bespoke computers in 1 week, and Motorola ships bespoke device production in less than 30 minutes, which previously took 3 weeks.
Competition in speed requires fast action, quick adaptation and an organization formed with tight ties. When management levels collapse, decision-making puts pressure on the organization and work is carried out in cross-functional teams. Change must be embraced and risk taking is encouraged. Close contact should be established with both suppliers and customers. Performance metrics reflect cost and profit in addition to time, speed, and rate. Strategy is timed to create a predictable rhythm for change..