In order for a small business to achieve the lowest possible costs, special attention must be paid to all activities in the business, from the acquisition of materials to the final sale to the end customer. It is said that today the competition does not depend from company to company but from supply chain to supply chain. Lower costs among all members of the supply chain will allow for lower prices from the final retailer and increase demand without lowering profit margins. Different strategies will help a small business gain cost leadership in any industry. The most common strategies, used by many small businesses, include economies of scale and learning, business process reengineering, product design, and buying materials in bulk.
Cost leadership strategies:
Scale economics they exist when proportional increases in the quantity of inputs result in lower unit costs. In the production of any good, a certain amount of fixed costs will be involved for the establishment of a production plant. Such costs are the storage facilities, the actual machines that produce the goods, the different vehicles used for transportation, overheads such as electricity, and many more that are essential to the production of goods. The more you produce, the lower the cost of each unit produced because the fixed costs are spread out. For this reason, it is suggested that businesses operate at full capacity. Underutilization will increase unit costs, but pushing production beyond full capacity will also create inefficiencies and thus higher unit costs. Boeing found that from costs like overtime pay, bonuses for night and weekend shifts, increased defects and increased maintenance.
Of course, manufacturing is not the only area where economies can be realized. Savings can also be achieved in areas such as human personal use, advertising, and new product development.
If your employees can perform to their full potential, you can produce more with less. Therefore, before you consider hiring more employees to increase revenue, you should first think about whether each employee is performing to their full potential. If not, you need to persuade and motivate them to increase their efforts, as a result the business earns more revenue without increasing costs.
Additionally, creating a national ad involves high costs both in development and in posting on national networks. The larger the business, the greater the spread of its advertising costs over its revenue. Advertising is considered a fixed cost and in the case of a National TV ad the cost will be the same for any company in the sector regardless of its size. Imagine two companies creating a TV ad that costs $100 million each. The first business has 500 million sales while the second business has 200 million sales. From this example, it is obvious that creating the ad for the first deal will be much more profitable than creating the ad for the second deal. Despite showing big numbers here, the same goes for smaller companies where you have to subtract a lot of zeros from the numbers. In any case, every company must remember that it is important to compare the distribution of its costs among its income.
A great example of this concept is the past consolidation in the global automotive industry that resulted from the enormous costs associated with developing new products. Many small and medium-sized companies merged because they didn’t have enough sales volume to cover those costs. The same thing happened in the aviation industry.
I’ve been talking a lot about most big businesses and while it seems like this technique will work better the bigger you get, you have to remember that cost isn’t the only priority for a business. For example, responding to your environment is also critical. If we argue that strong competition is a race between competitors, we could say that small companies have the advantage because they do not have large costs and therefore have the flexibility to overcome sudden changes in the economic, political or legal environment. In addition, small businesses can avoid the motivation and coordination problems that large companies face due to the large number of employees they have.
Learning savings: The human race has been able to evolve in the last thousand years mainly because of its ability to learn. We learn from our mistakes and thus improve by learning. The same is true in our everyday personal and business lives. Through repetition we can achieve individual skills and specialized organizational routines to provide dexterity and problem solving that every organization faces every day.
The ability to learn will increase productivity by doing more things right and fewer things wrong which can have a big effect on costs. Simply put, use less and produce more. This concept is closely related to whether a company relies more on automated or manual processes. The use of technology to accomplish a process can reduce the degree of error, while a manual process, which typically involves the use of human force, can be vulnerable to error. Choosing manual versus automated is a matter of relative input price. For example, Dell’s plant in Texas is fully automated, while China’s is much more labor intensive because wages are 90% lower than in Texas.
On the other hand, Toyota’s lean production had higher productivity gains that technological innovation cannot deliver. Mainly due to the Japanese ability to learn in small steps, rather than big steps compared to Western countries. They are able to improve their learning through a concept called Kaizen that includes continuous, endless, rather than radical, innovation.
Operational and business processes evolve over time without systematic direction or evaluation of their efficiency or effectiveness. Small businesses can use Business Process Reengineering to restructure your business and focus on activities that are profitable and capable of reducing waste. First, start with the question “If we started now, how would we design this process?” Combining multiple jobs into one, allowing employees to make decisions, and recognizing that processes have multiple versions for different situations are all examples of redesigning a system to be more efficient and productive. Also, pay close attention to the product design. Design your products and services to be functional and low cost by focusing on simplicity instead of complexity. Provide a simple aesthetic that can appeal to a larger target audience rather than a small group of them. Therefore, allow to reduce production costs and create a product that can attract a larger target audience.
buying in bulk can have a big effect on costs. The more you buy, the more your suppliers will be willing to offer lower prices. In addition, the place where you buy is also an important aspect. For example, buying from China will be much cheaper than buying from Italy. People have the perception that China’s products are of lower quality than other countries, but this notion is no longer valid.
By following these guidelines, a small business can lower its costs and become a leader in its industry. Low costs will allow the company to lower its prices and increase demand for its products and services. In turn, this will start a chain reaction where increased demand will allow even lower costs due to increased production and revenue.