Cost leadership beats all

There is one strategy that beats them all, to have the lowest cost! Cost leadership gives you freedom and makes you practically invincible, you achieve it through a combination of continuous improvement and innovation. Interested? Keep on reading...
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Disruptive innovation

The term Disruptive Innovation was coined by Professor Clayton Christensen and signifies an innovation that totally changes the rules for a market. When the T-Ford pricing came down to levels comparable to keeping a horse, the horse trade was disrupted and practically disappeared.

The examples of disruptive innovations are many: Peer-to-peer file sharing disrupted the music industry, electronic calculators and typewriters disrupted the mechanical versions, quartz watches changed time keeping, plastic changed many industries, digital cameras changed photography and low-cost airlines changed the travel industry. A new material, a new way of doing things or a change of policy can change an industry over night. Initially, those heavily invested in the old way, try with all means to discredit the new way - but eventually they have to give in.

A substantial cost for airlines are airport fees, low-cost airlines pay less by going to other airports and sometimes they pay nothing, or even get paid! It sounds incredible but makes sense, since a low-cost airline brings a huge increase of traffic, restaurants and shops at the airport sell much more and thus the lower fees are more than compensated.

What is ironic about airlines is that they disrupted the transatlantic steamers, but adopted the dress code and titles of the luxury steamers with pursers and commanders dressed in naval blue uniforms with golden insignias. Now the flag-ship airlines are disrupted by people from other industries, Virgin's owner came from the music industry and Southwest's from accounting. People from other industries play by other rules, see things differently and thus they can disrupt.

Some years ago, Soutwest's prices to client were lower than the competitions cost! When a company has the capacity to earn money while the competition bleeds, it can just sit back and wait because the victory will come to them. How is it possible to lower cost so much? Basically by doing things differently - by throwing the concept of "this is the way it is done" out the window.

Continuous improvement

To consistently improve and change can be hugely effective, but the challenge is to keep a beginner's attitude.

There is a story about Philips having the idea for a music CD and visiting Sony to talk about their Laser Disc technology that they had abandoned because of low sales. Thing was that Sony had improved on the LP for many years and the Laser Disc was in reality a digital LP which could hold many hours of music or video. The problem was that very few bands, with the possible exception of the Rolling Stones, had produced enough to fill a disc. Even the band that could would need to be paid the same amount per song, that made the discs far too expensive for the general public.

It is said that when the Sony engineers saw the Philips CD with space for a dozen songs, a general embarrassment broke out - nobody had seen the obvious, that the disc could be made smaller. Philips on the other hand had done it before, the compact cassette was theirs as well, a new format for a tape recorders (which was another disruptive innovation by the way).

To constantly challenge, to strive for change even when financial results are good - is what makes for successful and sustainable business! At least that is my conviction, what do you think?