How do you compete on cost?

Many companies make a point of competing on cost – making stuff cheaper than their competitors. One example would be an airline called Ryanair. Its CEO Michael O’Leary in this BBC interview has some interesting things to say about flying and his vision of what  air-travel should be.

He seems pretty determined to make flying cheaper, but also it seems that Ryanair’s model is actually to build revenues from the ground up. You start with a rock bottom price, say 1 pound for flying standing, but then you add fees for carry on, printed boarding passes, priority boarding, assigned seating, etc. In this respect another company, from a totally different industry, welding equipment manufacturer Lincoln Electric has a totally different approach.

What they are doing, which is illustrated here,  is equivalent to the top-down approach to cost savings. Send a team of consultants to a customer, evaluate business processes, determine how much savings would the customer have after switching to Lincoln and deliver on that. Or write a check if they fail. It is debatable what approach is better. One example is a service, the other is durable goods manufacturing. It seems though that Lincoln could actually use Ryanair’s model – that is to start with rock bottom prices and build them up. On the other hand, I have a hard time seeing Ryanair implementing Lincoln’s ‘we’ll do cheaper’ model. The reason is that by doing so Ryanair would put a ceiling on their upside, which is however infrequent, may result in substantial revenues. In fact 40% of them as per the interview.

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