Cost Leadership (Ch 6)

General

To reinforce some of the examples from the text, have a look at this article: Cost Leadership Examples.

LG and Cost Leadership

Here is a representation of strategy for LG that I took from an article called, "An Innovation Strategy for LG1":

This depicts cost leadership as being relevant to the low-end market. Generally, however, LG appeals to the high-end market and focuses on differentiation and in some cases, lock-in.

Nevertheless, there are a number of things that LG has done to manage costs, either to help themselves in the low-end market or to preserve some of the economic surplus generated by cost savings:

• In 2009, LG began an effort to reduce the amount of parts inventory on hand and tried to go to more of a just-in-time approach.
• Backward vertical integration: LG creates parts and insources nearly all the work needed to create its mobile phones. While outsourcing may appear to be a lower-cost alternative, LG's economies of scale seem to allow it to better control overall costs in the mobile manufacturing space by being highly vertically integrated.
• LG centralized its purchasing processes as part of an effort to un-silo its various divisions starting in 20082. As a result, no division can make purchases independently without centralized coordination and approval. This is saving the company an estimated $2B per year.

So while LG is not really a cost leadership player, like any well-managed firm, it attempts to control costs where the opportunity exists without compromising its ability to innovate.

1 Source: http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&cad=rja&ved=0CEQQFjAD&url=http%3A%2F%2Fwww.sba.pdx.edu%2Ffaculty%2Fdaveg%2F562%2FLG.pdf&ei=jDkFU_TyGY3LkAfkwIG4CA&usg=AFQjCNGDdlCnwb1V_fAQrL7PAxNWW0Wi7g&sig2=Qw7RK0_IIPLxVB3qnfziCw&bvm=bv.61535280,d.eW0
2 Source: http://www.businessweek.com/magazine/content/10_17/b4175037784791.htm