Cost Reduction Strategy The WritePass Journal

Cost Reduction Strategy Introduction Cost Reduction Strategy ). Horizontal integration Supermarkets have economies of scope when they offer a variety of products or services that do not comprise the usual basic goods and services available in supermarket stores (Abernathy et al, 2000). Such products and services may include ready cooked meals, financial services (such as retail banking), fuel stations, clothing and furniture, among other diverse provisions through a single service infrastructure, the store. These not only meet today’s busy shopper’s preference for a one-stop shop, but also lead to the provision of a complementary variety of products concentrated on the supermarkets core competence (Hines et al, 2004). This results in the distribution of costs over a wide and diverse range of products resulting in overall savings. The expansion of stores such as Morrisons, Tesco and Sainsbury into various service-provision segments (demand-driven diversification) so as to appeal to the modern consumer illustrates this strategy (Morrisons, 2012). A supermarket chain may also pursue related diversification building upon and extending existing capability, resources or expertise to achieve greater competitiveness. Cost savings are enabled when a business transfers expertise in one business to a new business, as well as in the businesses sharing operational skills and know-how, facilities, equipment or other existing assets including intangible assets such as corporate core competence (Handï ¬ eld and Nichols, 2002). This can be illustrated by the entry of supermarket chains such as Morrisons, Tesco and Sainsbury into the convenience store segment in pursuit of customer preference for smaller stores and small frequent shopping trends. This venture is in order to supplement waning revenues of larger stores (Morrisons, 2012). Outsourcing The progress of the general-purpose technology such as information technology (IT) enables the reduction of market transaction costs which leads to increased capacity for outsourcing (Abernathy et al, 2000). Outsourcing for a supermarket chain may entail contracting suppliers to undertake time-consuming and logistically challenging tasks such as warehousing and distribution, as well as new services such as the ready-cooked food segments. Such a strategy is necessitated if the existing mode of in-house performance of these tasks is more costly than obtaining it through market transactions or some form of long term contractual relationship (Hines et al, 2004). Efficiency is thereby enhanced in the conduct of the supermarket’s core activities, reducing costs associated with outsourced tasks and enhancing potential revenues increases. Product or service redesign Many supermarket chains are seeking to tap into new segments such as the online marketplace not only to meet customer preferences but also to reduce costs associated with its usual processes (Abernathy et al, 2000). In this customers order for product items which are then sent to their stated locations cutting off a number of processes that were hitherto undertaken thereby enabling significant savings. Morrisons, Tesco and Sainsbury, among other supermarket chains are pursuing such new market segments in pursuit of enhanced competitiveness and customer preference (Morrisons, 2012). Airline We consider an airline whose business provides basic services of passenger travel including scheduling, preparation and planning for flights, check-in, actual flight to destinations, and customer service. Pursuit of scope economics, outsourcing and product or service redesign which are the cost reduction methods focused upon in this paper are herein discussed with regard to an airline business. Economies of scope In this regard, vertical and horizontal integration mechanisms are discussed outlining their contribution to cost reduction. Vertical integration Vertical integration for an airline may entail the uptake of activities beyond its usual scope such as ticketing commonly undertaken by local service providers along its supply chain. Progress into such fronts is greatly enhanced by developments in internet technologies which enable customers to book flights, buy and print out tickets online, reducing the need for staff and investment on facilities dedicated to this task (Abernathy et al, 2000). This removes the costs of commissions paid out to the service providers as well as related organizational costs resulting in cost savings and greater efficiency. Horizontal integration To achieve economies of scope and thereby reductions in cost, an airline might venture into the cargo segment, customizing some of its existing planes for this purpose and delegating some staff under its organizational structure to run processes associated with cargo handling and transport. Through this related diversification of operations, the firm is able to build upon or extend its existing capability, resources or areas of expertise to achieve greater competitiveness (Handï ¬ eld and Nichols, 2002). An airline could also pursue mergers or scope acquisitions, to enhance or extend its product portfolio. This is a common trend in the industry with airlines frequently collaborating and coordinating their activities to achieve efficiency gains as well as to widen their geographical markets, reaching to routes across the globe and specific markets served by partner airlines which might not be feasible for it as a single entity (VBA, 2011). It has also become a common trend for airlines to invest in hotels and other facilities in the hospitality industry so as to tap onto an existing demand, as well as to reduce their costs in cases of delays and other unforeseen circumstances which usually result in added costs for the airline. This strategy turns the airlines previous challenges into strengths, as well as providing a revenue stream from related divestiture. Horizontal integration can be illustrated by Virgin airlines in its strategic alliances with Etihad Airways and Delta Air Lines which enhance its reach to the TransPacific Los Angeles route and the Abu Dhabi route, its gateway to Europe, Africa and the Middle East, with the collaboration benefiting all the partner airlines (VBA, 2011). Outsourcing Outsourcing for an airline is undertaken to streamline operations and enhance service quality (Wynstra et al., 2001). Tasks such as aircraft maintenance and ground support, as well as food processing for service on-board are labour-intensive and specialized tasks that can be outsourced if costs of contracting them are favourable. This would enable the airline to enhance focus on customer service and operations related to flight reducing overheads and other cost requirements. An example is Navitaire, a service supplier for airlines, which offers an extensive global distribution suite enabling low-cost reservations which has enabled the improvement of profitability especially among the low-cost airlines using the service, lower operational and distribution costs   and generation of ancillary revenues (Abernathy et al, 2000). Product/service redesign To enhanced service offerings in the competitive business environment and, as well, to rein in on rising costs, it is incumbent upon airline companies to conduct frequent network reviews, fleet realignments, operational integration so as to ensure that they remain profitable, effective and efficient in their processes. The company in the redesign and realignment should be bold enough to undertake thought-out exit from the non-profitable routes lowering its liabilities and costs. An example is Virgin Australia’s endeavour at restructuring in 2011 following its poor performance evident in its 2010 financial results (VBA, 2011). Conclusion For sustainability, the aim of the cost-cutting strategy is to maximize efficiency without compromising growth potential. To achieve this, companies need to identify core competencies upon which focus is enhanced and efficiency improved, with the non-core functions being trimmed and consolidated to achieve reduction in unnecessary costs (Hines et al, 2004). Such savings can be reinvested in critical assets, enhancing core competencies and thereby improving overall efficiency. References Abernathy, F., J., Dunlop, and J., Hammond, 2000. â€Å"Retailing and supply chains in the information age.† In: Technology in Society, Vol. 22, pp. 5-31. Campbell, A., 1992. Building Core Skills. In: Andrew Campbell and Kathleen Luchs: Strategic Synergy. London: Butterworth Heinemann. Handï ¬ eld, R., and E., Nichols, 2002. Supply Chain Redesign: Transforming Supply Chains into Integrated Value Systems. Financial Times. Prentice-Hall, Englewood Cliffs, NJ. Hill, M., R., Ireland, and R.., Hoskisson, 2001. Strategic Management: Competitiveness and Globalization. Fourth Edition. 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