Chapter 4

Sources of Cost Advantage are less likely to be rare

-cost advantages based on diseconomies of scare are not likely to be rare -if only a few firms are too large, then several competing firms in an industry that are not too large will have cost advantages over the firms that are too large - if a small number of firms happen to be sized appropriately then the cost advantages these firms obtain in this way may be rare -if a firm has proprietary technology development skills, it may possess rare technological hardware that creates cost advantages -policy choices are not likely to be rare source of cost advantage

Cost Leadership competitive strategy

-helps reduce the threat of new entreats by creating cost-based barriers to entry -new entrants will enter using another business strategy rather than attempting to compete on costs -low-cost position also reduces the threat of rivalry through pricing strategies that low-cost firms can engage i and through their relative impact on the performance of a low-cost firm and its higher-cost rivals -cost-leadership based on large volumes of production and economies of scale can reduce the threat of suppliers, -cost-leadership can can reduce the threat of buyers, powerful buyers are a threat to firms when they insist on low prices or higher quality and service from their suppliers, -buyers can be a threat through backward vertical integration, often not have costs as low as an incumbent cost leader -if cost leadership is based on large volumes of production, then the threat of buyers may be reduced because buyers may depend on just a few firms for the goods or services they purchase

Business-level strategies Corporate-level strategies

actions firms take to gain competitive advantages in a single market or industry actions firms take to gain competitive advantages by operating in multiple markets or industries simultaneously

1) size differences and economies of scale

economies of scale exist when the increase in firm size is associated with lower costs if the relationship between volume of production and average costs per unit of production, and if a firm has the largest volume of productions, then they will have a cost advantage increasing the volume of production can reduce a firm's costs for several reasons: -use specialized machines -build larger plants (process manufacturing) -increase employee specialization -spread overhead costs across more units produced

functional organizational structure

firms implementing cost leadership strategies will generally adopt this structure each of the major business functions is managed by a functional manager, usually the CEO (Chief Executive Officer)

cost leadership strategy

focuses on gaining advantages by reducing its costs to below those of all its competitors

6) Policy Choices

making choices about the kinds of products and services they will sell - choices that have an impact on their relative cost position -choose to produce relatively simple standardized products that sell for relatively low prices compared to the products and prices firms pursuing other business or corporate strategies choose, tend to have high volumes of sales, which reduce costs even further

bases of cost leadership that may be costly to duplicate

most of the successful firms that operate in unattractive industries make policy choices that are costly to imitate because they reflect historical, causally ambiguous, and socially complex firm processes

5) Technological advantages independent of scale

technology can be broadened to not just the physical tools that firms use to manage the business, but any processes within a firm used in this way -technological hardware: machines and robots -technological software: quality of relations between labor and management, an organization's culture, quality of managerial controls

U-form structure

U stands for "unitary" only one person in this org that has a broad, multi-functional corporate perspective

CEO in U-form structure has two basic responsibilities

(1) to formulate the strategy of the firm (2) to coordinate the activities of the functional specialists in the firm to facilitate the implementation of this strategy

sources of cost advantages

cost advantages are possible even when competing firms produce similar products 1) size differences and economies of scale 2) size differences and dis economies of scale 3) experience differences and learning-curve economies 4) differential low-cost access to productive inputs 5) Technological advantages independent of scale 6) policy choices

substitutes for sources of cost advantage

each of these businesses (exploiting economies of scale) treated separately - may have scale disadvantages, but collectively their scale creates the same low cost position as that of an individual firm that fully exploits economies of scale to reduce costs in a single business

4) differential low-cost access to productive inputs

productive inputs: any supplies used by a firm in conducting its business activities; labor, capital, land, raw materials -a firm that has differential low-cost access to one or more of these factors is likely to have lower economic costs compared to rivals -to have a cost advantage, the cost of acquiring low-cost productive inputs must be less than the cost savings generated by these factors

Environmental threats

suppliers can be a threat by charging higher prices for goody or by reducing the quality of goods cost leadership based on large volumes of production and economies of scale can reduce threat of suppliers powerful buyers are a threat when they insist on low prices or higher quality from suppliers

sustained competitive advantage

sustained competitive advantage depends on the strategy being rare and costly to imitate, through direct duplication or substitution

2) size differences and dis economies of scale

diseconomies of scale can increase costs if firms grow too large if volume of production rises beyond some optimal point, this can lead to an increase in per-unit costs if firms grow too large, smaller firms can gain cost advantage sources of diseconomies -physical limits to efficient size: there are physical limitations to the size of manufacturing processes -managerial diseconomies: as firm size increases, complexity increases, limiting the ability of managers to control and operate efficiently -worker de-motivation: specialization of jobs can be unmotivating for employees, as they are removed further from the complete product as an end result, quality and productivity can suffer -distance to markets and suppliers: the cost to deliver products can be very high the further they are from each other

3) experience differences and learning-curve economies

the link between cumulative volumes of production and cost has been formalized in the concept of the learning curve -the learning curve and economies of scale: 1) whereas economies of scale focus on the relationship between the volume of production data given point in time, the learning curve focuses on the relationship between the cumulative volume of production 2) where diseconomies of scale are presumed to exists if a firm gets too large, there is no corresponding increase in costs in the learning curve model as the cumulative volume of production grows -the learning curve and cost advantages: the learning curve applies whenever the cost of accomplishing a business activity falls as a function of the cumulative number of times a firm has engaged in that activity -the learning curve and competitive advantage: develops a model of cost-based competitive advantage that links learning with market share and average production costs -the first firms that successfully moves down the learning curve will obtain a cost advantage over rivals. to move down the learning curve, a firm needs to have higher levels of cumulative volume of production --criticisms: 1) acquisition of share itself is expensive 2) no room for any other business or corporate strategies