Chapter 4

● What are three ways that economies of scale produce cost advantages?

(1) better spread the fixed costs of production across more units, (2) spread nonfixed costs across more units, and/or (3) invest in the specialization of machines and employees that lower the per-unit costs of production.

Inputs:

Resources such as people, raw materials, energy, information, or financing that are put into a system (such as an economy, manufacturing plant, computer system, etc.) to obtain a desired output.

● What data would you need to calculate a scale curve or experience curve?

Scale: Cost per unit and Scale (Volume); Experience: Cumulative Volume and Product Cost

● What two dimensions define competitive advantage according to Michael Porter?

Source of Competitive Advantage: Cost or Differentiation; Scope of Operations: Narrow or Broad

● Why is it difficult for companies to utilize more than one cost advantage strategy?

The Integrated business level strategy is by far the most difficult to achieve and involves the greatest number of competitive risks for the firm.

Learning Curve:

The concept that labor costs per unit decrease with increases in volume due to learning. New skills or knowledge can be quickly acquired initially, but subsequent learning becomes much slower.

Relative Cost:

The costs incurred by one company compared to the costs paid by a competitor.

● What are linkages and how does one identify them?

The costs of one activity may be determined, in part, by the way in which other activities are performed.

Business Model:

The plan and set of activities implemented by a company to offer unique value and generate revenue and make a profit from operations.

Value Chain:

The sequence of all activities that are performed by a firm to turn raw materials into the finished product that is sold to a buyer.

Minimum Efficient Scale:

The smallest level of output (unit volume) that a plant or firm can produce to minimize its long-run average costs. In a graphic presentation of output/unit volume (x-axis) and cost per unit (y-axis), it is the output level where costs per unit flatten and no longer continue going down with increased output.

● How do you define cost driver?

There are seven principal determinants of a firm's unit costs (cost per unit of output) relative to its competitors

What are the four steps to VRIO Analysis?

identify valuable, rare and costly to imitate resources, find out if our company is organized to exploit these resources. protect the resources.

● What are technical inputoutput relationships?

increases in output do not require proportionate increases in input.

Efficiency:

the quality or degree of being efficient

Cumulative Volume:

the total amount since the company started making the product or providing the service

● What are indivisibilities?

they offer economies of scale as firms are able to spread the costs of these items over larger volumes of output.

● What are the four components to VRIO Analysis?

valuable, rare, costly to imitate, organized to capture value.

● What are the four ways companies can achieve cost advantage through lowercost inputs?

(1) exercising strong bargaining power over suppliers, (2) cooperating especially well with suppliers, (3) getting inputs from low-cost locations, and (4) arranging better access to inputs than other companies have.

● What are the four generic strategies companies can use to achieve competitive advantage?

Cost Leadership, Differentiation, Cost Focus, and Differentiation Focus

Scale Curve:

A graphic representation of the relationship between cost per unit and scale (volume) of production in a given time period.

● What is a scale curve?

A graphic representation of the relationship between cost per unit and scale (volume) of production in a given time period.

Economies of Scale:

A reduction in costs per unit due to increases in efficiency of production as the number of goods being produced increases.

Experience Curve:

A representation of the relationship between cumulative volume and product cost.

Cost Advantage Strategy:

A strategy in which the unique value offered to customers is lower-priced products or services.

Diseconomies of Scale:

An increase in marginal cost when output is increased.

● What are the benefits of analysing cost drivers?

Analyze a firm's cost position relative to its competitors and diagnose the sources of inefficiency.

● Which of the five major sources of cost advantage contributed to the Tata Nano being the world's least expensive car?

Proprietary knowledge

Task Specialization:

Breaking a large process into smaller tasks that require specialized knowledge.

Law of Experience:

Costs per unit decrease with increases in cumulative volume of production.

Fixed Cost of Production:

Costs such as plant and equipment, which are relatively fixed, meaning that they do not increase with an increase in the number of units produced.

● What are the five sources of cost advantage?

Economies of Scale or Scope, Learning and Experience, Proprietary Knowledge, Input Costs, Different Business Model

General and Administrative Costs (G&A):

Expenses and taxes that are directly related to the general operation of the company, and executive salaries, general support, and taxes related to the overall administration of the company.

● How is a scale curve different from an experience curve?

Experience Curve: A representation of the relationship between cumulative volume and product cost.

Employee Specialization:

Increased efficiency that results when employees perform a narrow range of tasks over and over again, leading them to acquire specialized knowledge that helps them complete the task more efficiently.

Proprietary Knowledge:

Information that is not public and that is viewed as the property of the holder.

● Why do companies have difficulty increasing their profitability by simply buying market shares?

Market share cannot be easily purchased. It is most often earned through a low-cost strategy or buy offer a superior product.

● What are the seven principal determinants of a firm's unit costs relative to its competitors?

PRICPEE, •Production techniques, •Residual efficiency, •Input costs, •Capacity utilization, •Product design, •Economies of scale, •Economies of learning: Experience curve

● What are the two main sources of bargaining power companies have over suppliers?

buying a lot from the supplier and using successful negotiating tactics.

● What is specialization and how does it relate to scale economies?

promotes learning, avoids time loss from switching activities, and assists mechanization and automation; firms are able to offer specialized expertise across a broad range of knowhow.