Dealing With Competition: Cost Leadership

Essentially, businesses embark on cost-leadership to earn higher margins/profits and competitive advantages by offering products or services at the lowest market prices through the vigorous pursuit of cost minimization techniques.

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For every business, whether in planning or execution, there is great concern around the idea of competition. With increasing competitiveness in local and global markets, and with the help of digital technologies that bring this competition to our doorsteps, it is definitely a challenge that affects every business–from large corporations to small businesses. But as with every challenge, there’s always an opportunity; it gives businesses a chance to develop their competitive edge as never before.

There are three generic competitive strategies that you can implement across your business: Cost leadership strategies, differentiation strategies, and niche strategies. This article will focus on just one, cost-leadership.

What is Cost Leadership?

Description: Cost leadership entails a business constantly working towards reducing the cost of its entire range of products in order to spend fewer resources in making the same quality and price or less of the prevailing markets. Cost leadership does not mean that a business produces goods that are of inferior quality or offer fewer services at comparatively cheap rates. Rather, it means the business produces goods or offer services that are of acceptable quality and specific to a set of customers at a price that is much lower or competitive than other businesses are offering to the market.

Definition: Cost leadership is the reduction of production costs better than your competitors such that you will be able to sell at lower prices and still be able to make more margin. Cost Leadership is doing away with any activity that is not the core of your business operations. These activities could be outsourced to organizations with a cost advantage in that particular niche. For example, Brandest can help can your business with digital communications, branding & design and social platforms management.

Essentially, businesses embark on cost-leadership to earn higher margins/profits and competitive advantages by offering products or services at the lowest market prices through the vigorous pursuit of cost minimization techniques. Costs may be reduced through improved operating efficiencies, production learning or scale economies, unique access to raw material, or special relationships with suppliers, distributors, or customers. Implementations of cost leadership are prevalent when you are dealing with commodities. Commodities can’t be differentiated with a specific feature, for example, water, steel, wood, cement, oil, cotton, foodstuff, sugar, salt, wheat, etc.

There are two major players in the Nigerian market that have demonstrated cost leadership and have edged out the competition in their area–the stories of both brands are intertwined. These are Dangote Cement and Dufil Prima Foods (makers of Indomie noodles).

Dangote Cement

Nigeria with a population of 170m+ people, a housing deficit of 17m and a per capita cement production of 122kg (versus the global average of 513kg), long term prospects for the Nigerian cement market are attractive. With this backdrop, Dangote Cement strategically sought to position itself as the lowest cost provider of high-quality cement. Dangote Cement is playing in the same market with international players such as Lafarge Holcim who were the market leaders at a time but Dangote came in with a mix of cost leadership strategies and outwitted them. Dangote found a way to reduce cost by locating its plants close to its owned significant limestone deposits and to areas of urban population and cement demand.

The next step to reduce cost was to use relatively inexpensive, modern machinery and construction costs by leveraging on close relationships with Chinese suppliers. Recently agreed upon a $4.3bn deal with Sinoma of China to construct new plants across Africa. Nevertheless, each world-scale plant costs ~$500m and has a development lead time of at least 5 years – significant barriers to entry for would-be competitors. Lastly, historically, its plants had relied upon imported and expensive Low pour fuel oil (LPFO) as their main fuel source but Dangote Cement has secured cheaper gas as its fuel a number of its plants (4x cheaper than LPFO).

One other thing Dangote did was the backward integration of truck assembly such that they took charge of the distribution system of the company products and has built a fleet of over 4,658 trucks to deliver to its key clients. This means that Dangote has control of its distribution value chain. The deliberate and aggressive implementation of a simple cost-effective business model has resulted in the dominant position that Dangote Cement currently enjoys. It is hard to see it relinquishing its position anytime soon in the Nigerian market.

Dufil Prima Foods (Makers of Indomie)

Dufil Prima Foods (DPF) was able to build scale and increased the barrier of entry for any new entrant into the noodles market. They built capabilities in the areas of energy, human resources and logistics. One of the things they did was setting up a flour mill that will feed their production lines. This sounds similar to the same strategy Dangote Cement implemented. Multipro Consumer Products Limited was the entity that helped the distribution and penetration of the product. DPF was in charge of both the upstream and downstream of the noodles category.

It was obvious when Dangote diversified into the same product lines that it was going to be difficult for Dangote to compete with this DPF because they were already doing everything that can help improve efficiency thereby making them the cost leader. After some years of trying but with limited success, Dangote conceded by selling the brand to them. DPF has control over the value chain in the noodles market which Dangote does not. With this, Indomie noodles remain the category leader with over 80% market share.

To further reduce the extremely high importation cost, in 2020, DPF invested c.USD8m in cassava processing plant. DPF’s strategy is to maintain its dominant brand in the noodles’ segment of the food business by capacity expansion, acquisition of small competitors, aggressive marketing and an efficient distribution system.

Business strategies don’t have a “one-size fits all” approach. What matters is trying different strategies and choosing the one that best fits for your business and applying it to the highest degree possible.

References:
http://www.bbc.com/news/business-34067963
https://digital.hbs.edu/platform-rctom/submission/dangote-cement-a-story-of-market-dominance/
https://www.proshareng.com/admin/upload/report/14453-GCR%20Issuer%20Rating%20Report-proshare.pdf

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Dealing With Competition: Cost Leadership

Essentially, businesses embark on cost-leadership to earn higher margins/profits and competitive advantages by offering products or services at the lowest market prices through the vigorous pursuit of cost minimization techniques.

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