Case example: Cost culture change to cost leadership

Porter’s (1980, 1985) generic strategies belong to the most cited concepts to date (see e.g. Chrisman, Hofer, & Boulton, 1988). In the original form, Porter (1980, 1985) does not explore the effect of the generic strategies on all internal and external aspects of a business in detail. Take the generic cost leadership strategy, for example. Obviously, Porter’s (1980, 1985) central aspect is that cost leadership can only be achieved by completely changing cost culture. In the following, we will use the PNC to show that a change in the cost culture has effects throughout the network including direct and indirect effects in the action circle, where the indirect action effects are caused by changes of the other variables in the culture circle. Figure 2.2 visualizes how the PNC helps to identify the full range of change effects that are partially straight forward, but in other parts unexpected.

Imagine, an enterprise decides to attain cost leadership (COST CULTURE). This results in cost cuts in all aspects but will lead to differing, partly unexpected effects, as the following example shows.

the INTERNAL COMMUNICATION CULTURE and in the WORK CULTURE will generally lead to a decline of employee satisfaction (HRM). The effect of cost leadership on the

INCENTIVE CULTURE may vary. On the one hand, if the enterprise previously provided many fringe benefits and perks to incentivize employees, cutting the cost may lead to a decline of employee satisfaction. On the other hand, if no productivity incentive whatsoever was provided, decreasing production cost may involve changing the incentive culture to one with internal competition. Cost cuts may decrease customer satisfaction due to a slowdown in innovation and quality, i.e. a change in PRODUCT CULTURE¹² and INNOVATION CULTURE, the latter having a negative impact onSALES. As spending for EXTERNAL COMMUNICATION (CULTURE) will also be minimized, the enterprise may exclusively concentrate on price communication and thus potentially loose existing customers due to a decrease in corporate and product image campaign. One way to solve this conflict is to increase the budget for MARKETING AND MARKET COMMUNICATION, at least for the time immediately after the strategy adoption. Finally, increased effort will be necessary to adapt the GOVERNANCE CULTURE to the changes caused by cost leadership.

Figure 2.2 shows the elements of the action circle aspects of the PNC with violet color in column 2. We suggest that cost leadership will lead to a restructuring of

PRODUCTION, for example by outsourcing internal services and production.

Furthermore, cost leadership may lead to a decreased product range. Evaluating the most efficient products and finding adequate producers may take time and thus result in costs of screening and adaptation of PRODUCTION. The changes in

PRODUCTION are costly and further influence HRM. Outsourcing may lead to a decrease of the workforce, of the quality of training and of general working conditions. These HRM changes can have a feedback effect on the INCENTIVE CULTURE and the WORK CULTURE, but also on INNOVATION CULTURE and the

PRODUCT CULTURE of the enterprise. A decrease of quality of training further influences SERVICE and R&D. Consequently, innovative growth as the engine of an

RELATIONSHIP. Less contact to customers due to cost cuts in customer services might hence make it difficult to evaluate the customers’ wants. In addition, less training combined with outsourced business functions, might result in a minimization of internal R&D efforts. However, as innovation is a crucial aspect in the global network economy, expensive external solutions must be acquired to enable successful competition.

The enterprise may also search for external solutions in the field of ACCOUNTING. These alternatives might lead to short-term cost cuts but we expect long-term cost increases due to control costs. Partnerships as joint-ventures (JOINT-PRODUCTION ASSEMBLY) will also suffer from cost cuts.

The relationship aspects of the PNC are framed in green color in the third column of Figure 2.2. Cost cuts might have the following effects on the mutual interest sphere:

SHAREHOLDER/INVESTOR RELATIONSHIPs can suffer from cost cuts, on the one hand.

It might be less attractive for existing shareholders to further invest in the enterprise after its strategy change. Finding new investors is time- as well as cost-intensive. On the other hand, shareholders might be interested in cost leadership strategy, because the internal overhead is reduced and the outcomes turned to shareholders as profits.

Cutting prices of existing suppliers (SUPPLIER RELATIONSHIP) to minimize costs might result in the end of long-term contracts. Finding alternative and cheaper suppliers causes search costs. Having found new suppliers, the enterprise has to test potential new resources regarding quality and compatibility which again results in an increase of costs. In regards to ACQUISITIONS, the enterprise might minimize spending. This influences growth and innovativeness of an enterprise.

Concerning the peer and the public interest spheres, cost leadership might lead to a competitive advantage in prices (COMPETITIVE AND/OR COOPERATIVE RELATIONSHIP) which is obviously left to be questioned whether being enduring. At the same time, spending on RESPONSIBILITY will be reduced which might have negative effects on the trade interest sphere (CUSTOMER RELATIONSHIP, MARKETING AND MARKET

lead to a simultaneous increase of costs by searching for alternative sales channels and training the new sellers. Here, a conflict occurs, as we assumed above that trainings shall be decreased due to cost cuts.

Summing up the short case study of changing cost culture to cost leadership by cutting costs, we can conclude that the PNC shows the outcomes in more detail than foregoing concepts could do. In fact, changes have effects throughout the network including direct and indirect effects. We visualized the unexpected cost effects with a “€” in Figure 2.2 just to show a few outcomes on hand. Thus, besides structuring and visualizing the complexity of possible changes of cultures, actions and relationships, the PNC enables to see cost increases where cost cuts are aimed at.

One can use the PNC to find a sensible cost cutting strategy that fits to the enterprise’s wants.