Organisations that compete on cost relentlessly pursue the elimination of all waste. In the past, organisations in this category produced standardised products for large markets. They improved yield by stabilising the production process, tightening productivity standards and INVESTING in automation. Today, the entire cost structure is examined for reduction potential, not just direct labour costs. High-volume production and automation may or may not provide the most cost-effective alternative.
Take the example of Southwest Airlines’ strategy of low-cost, no-frills air transportation that forever changed the public’s attitude towards flying. The strategy is supported by carefully designed service, efficient operations and committed personnel. Southwest uses only one type of airplane, the Boeing 737, to facilitate crew changes and to streamline training, record-keeping, maintenance and inventory costs. Turnaround time between flights is 15 minutes. Since its flights are limited to short routes, all flights are direct. That means no baggage transfers and no meals to be served. There are no assigned seats and no printed boarding passes for flights. Boarding priority is
a function of arrival time at any Southwest check-in facility. Southwest saves tens of millions annually in travel agent commissions by requiring customers to contact the airline directly to book flights. The airline carefully selects employees and reinforces its commitment with a model profit-sharing plan. The result is Southwest flies more domestic passengers than any other airline in the US and EARNS MORE MONEYthan all other US airlines combined. Its on-time performance, baggage handling and customer satisfaction are always among the best in the industry. The discount airline in Malaysia, AirAsia, is making similar choices on competitive strategic positions, and has beaten the odds to find the ‘blue ocean’ in a very competitive industry.
Organisations that compete successfully on cost realise that low cost cannot be sustained as a competitive advantage if increases in productivity are obtained solely by short-term cost reductions. A long-term productivity ‘portfolio’ is required that trades off current expenditures for future reductions in operating cost. The portfolio consists of INVESTMENTS in updated facilities and infrastructure; equipment, programs, and systems to streamline operations; and training and development that enhances the skills and capabilities of people.