5 sources of cost efficiency
In my work as an advisor and consultant over the years one of the biggest areas of neglect for businesses has been consideration of cost efficiencies. Their focus has been on traditional elements of business development, generating interest and making sales. Cost efficiencies, however, can be equally beneficial to and organisation. Customers can benefit from lower prices or added features for the same prices. Cost efficiency is determined by a number of factors called cost drivers. I offer an important fifth factor here – the value proposition itself. If an organisation is offering too much to the customer which isn’t offering value to them the organisation has cost inefficiencies.
- Economies of scale – these are traditionally an important source of cost advantage, typically within manufacturing organisations. In other industries similar economies of scale can be found in distribution or marketing costs. You should focus then on trying to secure your competition advantage in areas that you are good at which maintain scale advantages.
- Supply costs influence an organisations overall cost position. Location may influence your supply costs which is why many organisations which rely on the supply of goods or people locate themselves close to these resources. It is important then to focus on what goods or people your business will require now and in the future and seek to reduce the costs where possible.
- Product / process design also influences the cost position. Efficiency gains in production processes have been achieved by many businesses over a number of years. Equally important though are improvements in efficiency for service businesses. Improvements in service processes can have dramatic effects on the cost efficiencies of a service business, particularly in the efficiency of your most valuable resource – your staff.
- Experience can be a key source of cost advantage. In any segment of an industry, price levels tend to be very similar for similar products. Therefore, what makes one company more profitable than the next must be the next level of costs. Any organisation undertaking any activity learns to do it more efficiently over time.
- Value proposition is the often forgotten element of cost efficiency. The issue here is understanding really what your customer value and to provide them with just that. Providing them with added extras which they do not value simply creates cost inefficiencies for the organisation without adding any real benefits. One important caveat to this though is that what customers value will vary over time and will vary dependent upon the customer themselves.