Michael_A._Hitt,_R._Duane_Ireland,_Robert_E._Hosk

Chapter 4: Business-Level Strategy 119

low-wage employees (e.g., China).^53 However, care must be taken because outsourcing
also makes the firm more dependent on supplier firms over which they have little control.
Outsourcing creates interdependencies between the outsourcing firm and the suppliers.
If dependencies become too great, it gives the supplier more power with which the sup-
plier may increase prices of the goods and services provided. Such actions could harm the
firm’s ability to maintain a low-cost competitive advantage.^54
Cost leaders also carefully examine all support activities to find additional potential
cost reductions. Developing new systems for finding the optimal combination of low cost
and acceptable levels of differentiation in the raw materials required to produce the firm’s
goods or services is an example of how the procurement support activity can facilitate
successful use of the cost leadership strategy.
Big Lots, Inc. uses the cost leadership strategy. With its vision of being “The World’s
Best Bargain Place,” Big Lots is the largest closeout retailer in the United States with
annual sales approaching $5 billion from more than 1,400 stores. For Big Lots, closeout
goods are brand-name products from 3,000 manufacturers provided for sale at substan-
tially lower prices than sold by other retailers.^55
As described in Chapter 3, firms use value-chain analysis to identify the parts of the
company’s operations that create value and those that do not. Figure 4.2 demonstrates

Figure 4.2 Examples of Value-Creating Activities Associated with the Cost Leadership Strategy

Support

Functions

Value Chain

Activities

Customers

Finance

Manage financial resources to ensure positive cash flow and low debt costs.

Supply-Chain

Management Operations Distribution

Marketing

(Including

Sales)

Follow-up

Service

Effective

relationships

with suppliers

to maintain

efficient flow

of goods

(supplies) for

operations

Build

economies

of scale

and efficient

operations (e.g.,

production

processes)

Use of low-

cost modes of

transporting

goods and

delivery times

that produce

lowest costs

Ta rgeted

advertising

and low

prices for

high sales

volumes

Efficient

follow-up

to reduce

returns

Develop policies to ensure efficient hiring and retention to keep costs low.

Implement training to ensure high employee efficiency.

Human Resources

Develop and maintain cost-effective MIS operations.

Management Information Systems

Source: Based on M. E. Porter, 1998, Competitive Advantage: Creating and Sustaining Superior Performance, New York: The Free Press; D. G. Sirmon, M. A. Hitt, &
R. D. Ireland, 2007, Managing firm resources in dynamic environments to create value: Looking inside the black box, Academy of Management Review, 32:
273–292; D. G. Sirmon, M. A. Hitt, R. D. Ireland, & B. A. Gilbert, 2011, Resource orchestration to create competitive advantage: Breadth, depth and life cycles
effects, Journal of Management, 37: 1390–1412.