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Cost leadership is a strategy used by businesses to create a low cost of operation within their niche. The use of this strategy is primarily to gain an advantage over competitors by reducing operation costs below that of others in the same industry. Mass customization is a marketing and manufacturing technique that combines the flexibility and personalization of custom-made products with the low unit costs associated with mass production.
Usually the more successful companies with innovative products are the ones providing a large amount of variety and customisation, this is because all consumer needs are met and so the product can be available to more consumers. With Dell in the innovative PC market focussing on cost leadership and therefore reducing their customisation range, they may suffer some demand loss as more of customers’ needs are not met and some customers may have purchased a choice that is not available anymore. Also, as many competitors have reduced their product/customisation range also, some customers may feel that Dell has a USP and that their PC’s are the only ones left offering a real variety of choices for customisation, which could even further damage the company’s future demand. Therefore, focussing on cost leadership this would leave Dell in a bad situation of falling demand, however Dell’s data has showed that only a small percentage of combinations are wanted by customers, and so by reducing the variety would only affect the demand very slightly. This means that perhaps the fall in demand would almost be unnoticeable and so Dell would be right to focus on cost leadership.
Most companies would like to reduce the risks of a constant production flow, in doing so they would make the supply chain less complicated, so that there is a minimised risk of production disruptions. For Dell in a PC market there is very rarely one company that produces all computer parts and so they must source parts from other places, by not focussing on cost leadership Dell had a large issue with customisation as they had to source many more different parts from lots of different places in order to meet the consumer’s customisation. This would have made it hard to manage all of the different suppliers and as there was so many different parts to the chain, there was more space for errors, this could have been a delay or production disruption, either way stopping production would heavily increase total and unit costs for production. By focussing on cost leadership and reducing customisation they would have been able to reduce this risk by cutting parts of the chain out and so reducing unit costs and therefore it was right to focus on this. Despite this however the number of dissatisfied customers and the risk of the supply chain issues has probably remained as the company wishes to source materials globally in order to get a lower price. This therefore may have actually increased their risk of production disruption due to the fact that global transport methods are susceptible to weather. Therefore, focussing on cost leadership could actually have increased their risk of production delays and dissatisfied customers which is something that you really need to minimise in a highly competitive market such as the PC one, so they may be wrong to focus on this.
Lastly most companies would want to gain economies of scale (increasing output creates falling unit costs) or become more productively efficient in some way as this helps to become more successful as a company in general. For Dell a fall in unit costs is highly needed as this allows the company to reduce their prices and so create more demand for their products. This is why I would say that focussing on cost leadership and reducing their product customisation range, they could produce more for a cheaper cost and therefore bring down their unit costs in order to achieve lower priced products. This would be highly beneficial to the company as they could then gain a competitive advantage which is essential to success in a highly competitive market such as the PC one, therefore I would say focussing on this is a good thing. Also, they would have reduced overall costs and therefore a greater profit, which is something they are finding hard to achieve like Apple does with ease. Therefore, this will both push up their dwindling profits and bring them back to a secure level or then reduce their prices to make their price leadership strategy successful again and allow them to gain demand making this the right thing to do. However, if this turns into diseconomies of scale when not managed properly their unit cost could actually increase and this is where focussing on cost leadership may actually be the wrong thing to focus on.
In conclusion Dell’s decision to focus on cost leadership, will create a lower unit cost of each product by offering less of a variety and so being able to mass produce and gain economies of scale, which will enable Dell to lower their prices and gain a competitive advantage which is extremely useful in such a highly competitive market such as the PC one. This would then give Dell a larger market share and enable them to achieve a higher sales revenue and eventually profit which they appeared to struggle with previously. Despite this there are potential costs to this strategy, for one there would be a chance of diseconomies of scale occurring if they are unable to manage their operations properly, and the chance of this is especially high with their sourcing moving globally, making their supply chain even more complicated potentially than it is already. For this reason, I would say that Dell are actually wrong to focus on cost leadership as I feel that the risks associated in doing so would be costlier if they were to happen than the extra sales revenue or profit brought in.
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