Cost Leadership and Economic Uncertainty

Cost LeadershipAdopting an Effective Cost Leadership Strategy

Agenda

2

• What is Cost Leadership?

• Examples of Successful Initiatives

• Implementing Cost Leadership

What is Cost Leadership?

3

Michael Porter’s three business strategies

What is Cost Leadership?

4

Cost Leadership, is based on being the lowest cost producer in an industry, for a certain quality of product.

Improve process efficiencies

Gain unique access to a source of lower cost materials

Outsource and use lower cost alternatives for appropriate functions

Avoid certain costs altogether

Examples of Successful Initiatives

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CRH PLC

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PLC

Babco

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PLC

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20

40

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Top 10 FTSE 100 Risers

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Companies focusing on cost are among the FTSE 100 risers this year

Cost leadership strategy


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• Focus on relatively inexpensive food and hotel prices.• Whitbread has championed the

appointment of dedicated management teams to improve operational and cost efficiencies.• Whitbread has focused on improving

procurement practices, menu management and labour scheduling.

- use of e-auctions to minimise the impact of rising commodity prices the business saved £400,000 pa on potatoes.

Whitbread has followed a cost leadership strategy


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• CRH’s cost reduction programme, initiated in 2007, was reviewed and extended as further measures were put in place to improve efficiency.

• This brought the cumulative annualised gross savings implemented over the period 2007-2011 to €2 billion of which €0.5 billion was realised in 2010.

CRH has successfully employed the principles of cost leadership as part of its strategy since 2007


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• Profit before tax rose 21 per cent to 152.8 million pounds in the year ended June on a 15 per cent increase in revenue to 238.7 million pounds.

• The company said cost control was a key contributor. Net operating expenses increased 6 per cent as its efforts to restrain rising staff and administrative costs largely offset the impact of a 30 per cent hike in its contributions to an industry compensation scheme.

• An example is the increased proportion of marketing being conducted electronically, at a cheaper cost.

Hargreaves Lansdown beat full-year profit forecasts through tight cost control and a broad product range


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• The integration of ex-VT businesses delivered substantial cost synergies rising from revised organisation structures and enhanced procurement activities.

• Revenue synergies are also being delivered, in particular in the Nuclear and Mobile Asset businesses, where the combination of Babcock and VT skills and capabilities have delivered innovative propositions and further improved our marketing positioning.

Babcock a focus on growth led the firm to embrace cost leadership principles


10

Ryanair has introduced a number of measures which have helped the business make a profit of €503m in the past financial year.

• Working to eliminate the need for check in desks.

• Cutting the weight of its aircrafts.

• Examining the possibility of larger aircraft doors, to speed up boarding.

• In a similar vein, Easyjet, is to introduce allocated seating in an attempt to secure revenue from having passengers pay to choose their seats.

Ryanair, a consistent drive to manage costs

Examples of Successful Initiatives within the Food Industry

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• A Network Optimisation initiative being carried out to reduce empty miles and increase efficiency within the clients’ supply chain.

• CAST modelling tool was used to gather all data on ingoing and outgoing transport flows from client factories and distribution centres.

• Geo-mapping techniques were used to match outbound customer deliveries with inbound raw material deliveries to leverage the benefits of round trip pricing.

• Initial savings of 18 per cent were achieved on transportation costs.

Project Flow


12

• Following the implementation of the Agency Worker Regulations (AWR), agency workers gained entitlement to the same treatment as permanent employees. The financial impact would have increased the costs of agency labour to an unacceptable level.

• 4C implemented a Swedish Derogation Model, which is exempt from equal treatment provisions on pay. The outcome of the negotiations was not only total mitigation of the on-costs associated with AWR, but also immediate cost savings from an improved margin.

The Swedish Derogation Model


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• A broad brush cost reduction and cash release exercise across all categories, all geographies and all suppliers with spend over £100k.

• Suppliers were further segmented by their effective impact to business in case of non-supply. Different negotiation strategies were adopted for each different segment.

• The project entailed requesting a 4.7 per cent price decrease and harmonisation of payment terms towards the 75 days standard (excluding small businesses).

Bondi

Implementing Cost Leadership

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• Understand your company strategy

• Know how you compare to other businesses in terms of inputs and outputs

• Develop and implement cost leadership strategies

Documents

Cost Leadership and Economic Uncertainty