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Week 4 Notes Business Policy

by: Whitney Smith

Week 4 Notes Business Policy BUS 4853

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Whitney Smith

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Week Four Notes on Chapter 4 in Business Policy
Business Policy
Hanqing Fang
Class Notes
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This 6 page Class Notes was uploaded by Whitney Smith on Thursday February 18, 2016. The Class Notes belongs to BUS 4853 at Mississippi State University taught by Hanqing Fang in Spring 2016. Since its upload, it has received 40 views. For similar materials see Business Policy in Business at Mississippi State University.

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Date Created: 02/18/16
The Strategic Management Process External Analysis Chapter 4 Strategic Strategy Competitive Cost Mission Objectives Choice Implementation Advantage Leadership Internal Analysis Business Level Corporate Level Strategy Strategy A theory about A theory about competitive advantage competitive advantage in one business across multiple businesses 4-22 Business Level Strategies Sources of Cost Advantage Two Generic Business Level Strategies 1.  Economies of Scale 2.  Diseconomies of Scale Cost Leadership: 3.  Learning curve economies • gaining competitive advantage by having lower costs 4.  Differential Low-Cost access to Productive Inputs than all competitors 5.  Technology Independent of Scale Example: Wal-Mart 6.  Policy choices Product Differentiation: • gaining competitive advantage by offering products that customers prefer over competitors’ product Example: Harley-Davidson 4-33 4-44 1 Class discussion Sources of Cost Advantage 1. Economies of Scale • Average cost per unit falls as quantity increases – Until z Think of the automobile industry minimum efficient scale is reached z What is an automaker that uses cost leadership •  Caused by spreading fixed costs – specialized strategy? z What is an automaker that uses product machines and overhead. Scale economies are especially strong in process manufacturing. differentiation strategy? •  Example: Suppose the investment cost of a machine is z Are there any companies that use both $50,000—whether the machine produces 1,000 pieces or 10,000 pieces the investment cost is the same, but the per unit strategies? cost falls from $50 to $5 •  Specialization of labor 4-55 4-66 Book Example Two / Thirds Rule z You want to figure per unit cost difference in moving from a capacity of 1,000 to a capacity of 10,000. z Page 106 in the text Assume you will produce to maximum capacity z Used to figure out per-unit cost savings for z STEP ONE an increase in capacity z Total cost of plant / equip. for 1,000 units= z Total Cost of plant and equipment = volume 1,000^(2/3) = $100 of maximum production ^ (2/3) Per unit cost of plant/equipment z Per Unit Cost: divide that cost by actual $100 (total cost) / 1000 (max. units) = $0.10 volume of production to figure per-unit cost of plant / equipment 4-77 4-88 2 Book example, cont’d STEP THREE z STEP TWO z Total cost of plant / equip. for 10,000 units= z Per unit savings from extra capacity 10,000^(2/3) z $.10 - $.05 (rounded up) = $465 Per unit cost of plant/equipment z = $.05 , so average cost decreases by ½ after $465 (total cost) / 10,000 (max. units) = $0.0465 capacity jumps from 1,000 to 10,000. Per unit cost of plant/equipment z Caution– this assumes you are producing at $100 (total cost) / 1000 (max. units) = $0.10 full capacity. 4-99 4-1100 Sources of Cost Advantage Sources of Cost Advantage 2. Diseconomies of Scale 3. Learning Curve Economies • are an advantage for those who do not have • a firm gets more efficient at a process with cumulative diseconomies of scale experience 1. Physical limits to production (nuclear reactors) • the more complicated/technical the process, 2. Managerial diseconomies the greater the experience advantage 3. Worker de-motivation • typically increase as market share increases, but 4. Centralized plants increase transportation costs market share may be expensive to acquire, potentially offsetting learning curve economies 4-1111 4-1122 3 Sources of Cost Advantage Sources of Cost Advantage 4. Differential Low-Cost Access to Productive Inputs 5. Technology Independent of Scale • may allow small firms to become cost competitive • may result from: e.g., Amazon, Ebay, HP, etc. • history—being in the right place at the right time • size of the advantage depends both on how valuable and protectable the technology is • being first into a market—esp. foreign markets •  Technological hardware: • natural endowment—owning a mineral deposit machine and robots •  Technological software: • locking up a source—buying all of its output customer relationship leader-follower relationship organizational culture 4-1133 4-1144 Sources of Cost Advantage Cost Leadership & Competitive Advantage 6. Policy Choices A source of cost advantage will lead to competitive advantage if that source is: • Firms get to choose how they will serve the market. Low cost producers typically serve mass markets • Valuable with relatively standardized products. • Rare •  Can develop a cost conscious culture in which managers and other employees are given incentives • Costly to Imitate to constantly look for ways to reduce per unit costs . • Organized (Implemented Appropriately) Examples: Southwest Airlines Walmart CEO 4-1155 4-1166 4 Value of Cost Leadership Advantage Valueof a Cost Advantage: External Analysis Competitive Market Entry Buyers • increases capital • lowers incentives ATC ind requirements for buyers to for entrants vertically ATC ff integrate P D Rivalry Substitutes • competitors rationally Suppliers Above Normal avoid price competition • increases Economic • limits importance of the Returns Q attractiveness focal firm to the of substitutes supplier 4-1177 4-1188 Organizational Structure for Cost Leadership Rareness and Imitability of a Cost Advantage Simple Structure • Owner/Manager makes all major decisions z  Likely to be Rare and z  NOT likely to be Rare non-imitable and non-imitable directly and monitors all activities z Learning curve z Economies of scale • difficult to maintain this structure as the firm economies (esp. Diseconomies of scale grows in size and complexity emerging industries) z Technological z Differential low-cost hardware (unless it is Owner skill at developing it) access to inputs z Technological software z Policy choices Employees 4-1199 4-2200 5 Organizational Structure for Cost Leadership Organizational Structure for Cost Leadership Functional Structure (U-Form: Unitary) Functional Structure • Divides responsibilities among functional managers Chief Executive Officer • marketing • procurement • HR • finance • production • logistics • accounting • R&D • etc. • CEO is responsible for: Finance Accounting Marketing Human Resources •  Strategy Formulation •  Coordinating Functions for Strategy Implementation Production R&D 4-2211 4-2222 Organizational Structure for Cost Leadership Organizational Structure for Cost Leadership The Functional Structure and Cost Leadership Compensation and Cost Leadership • specialization within functions facilitates cost reduction •  few layers with simple reporting • Below average base pay combined with strong rewards that are tied to •  small corporate staff costs . •  focus on narrow range of functions that are central to competitive advantage. 4-2233 4-2244 6


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