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Business Level StrateWhat are the two main argies and Corporate Level
eas os strategic choice?
Strategies
What are business level
strategies?
They are actions firms
take to gain a competitive
advantage in a single market or industry.
They are actions firms
take to gain a competitive
What are corporate level
advantage by operating in
of strategies?
multiple markets or industries simultaneously.
What are the two generic Cost leadership and Prodbusiness level strategies? uct differentiation.
What is cost leadership
business strategy?
A firm focuses on gaining advantages by reducing its costs to below those
of all its competitors
What are two examples
BIC and Hyundai and Walof businesses who use an
mart
cost leadership strategy?
-Size differences and
economies of scale
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-Size differences and diseconomies of scale
-Experience differences
and learning curve
economies
What are the 6 sources of
-Differential low-cost accost leadership?
cess to productive inputs
-Technological advantages independent of
scale
-Policy choices.
Increase in volume (firm
How is economies of scale size) and lower the avera cost advantage?
age cost per unit of production.
What is economies of
scale?
Economies of scale exists
when the increase in firm
size is associated with lower costs. As the level of
volume of production increases, the average cost
per unit decreases until
some optimal point, after
which the average costs
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per unit of production begins to rise.
-Allow more use of specialized machinery
-Can reduce cost of plant
What are some sources of and equipment
scale of economies?
-Can allow more employee specialization
-Lower overhead costs per
unit
When a firm has a highHow does scale of
er level of production, it is
economies allow for more able to purchase and use
use of specialized machin- specialized manufacturing
ery?
tools that cannot be kept in
operation of small firms.
Firms can build largHow can scale of
er manufacturing facilities,
economies reduce cost of
sometimes making costs
plant and equipment?
of production lower.
As workers specialize in
How can scale of
accomplishing a narrow
economies allow for more
task, they can become
employee specialization?
more and more efficient at
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this task, thereby reducing
their firm's costs.
How can scale of
economies lower overhead costs per unit?
The more units of production, the wider spread of
overhead costs.
Diseconomies of scale exists when the average
What is diseconomies of costs per unit of producscale?
tion begin to rise beyond
the optimal point and increases per unit cost.
When a firm has a large
plant capable of producing
Example of diseconomies a large amount in one loof scale?
cation, the cost of transporting the goods starts to
increase the cost per unit.
-Physical limits to efficient
size
-Managerial disecWhat are the major
sources of diseconomies onomies
-Worker de-motivation
of scale?
-Distance to market and
suppliers.
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When firms increase in
size, they increase in comHow can diseconomies of
plexity, and the ability of
scale cause managerial
managers to control and
diseconomies?
operate it efficiently becomes limited.
A firm huge size with increased complexity can
What is an examexpect to see a large numple of managerial disecber of breakdowns, high
onomies?
percentage of idle lines,
and poor quality products.
Specialized work makes
people feel like an unimportant cog in the wheel.
How can diseconomies of
When firm sizes increases
scale cause worker demoworkers get moved further
tivation?
away from the complete
product and feel more obscure.
Having only 1 massive
How can diseconomies of plant can increase the
cost of transportation to
scale cause distance to
key markets and from supmarket and suppliers?
pliers.
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What is learning curve
economies?
are about lower average
costs from CUMULATIVE
VOLUME. (how much a
company has produced
during its whole history.
-Economies of scale focus on the relationship
between the volume of
production at a given
point in time and average
unit costs, where learning
curve economies focus on
cumulative volume and avWhat are the two impor- erage unit costs.
tant differences between -Diseconomies of scale
learning curve economies are presumed to exist if a
and scale economies?
firm gets too large, there
is no corresponding increase in costs in the
learning curve economies
as cumulative volume begins to grow. Rather, costs
continue to fall until they
approach the lowest technological possible cost.
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Are the learning curve
economies restricted to
just manufacturing?
No, learning curve can be
associated with any business function, from purchasing raw materials to
distribution and service.
What are productive inputs?
any supplies used by a
firm in conducting its business activities; such as labor, capital, land, raw materials.
A firm that has differential
low-costs access to one
How does differential low
or more of factors such
cost access to productive
as labor, capital, land,
inputs increase cost adand raw materials is likevantages?
ly to have lower economic
costs compared to rivals.
Technology based advantages are not restricted
How can technological adto just manufacturing (mavantages independent of
chines, computers, physiscale provide a cost adcal tools) it can produce
vantage?
technological advantages
in other functional areas
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such as marketing and
service.
Technological hardware of
companies
machines and robots
quality of relations between labor and manageTechnological software of
ment, an organizations
firms
culture, quality of managerial controls.
Firms make choices about
the kids of products and
How can policy choices services they will sell provide cost advantages? choices that have an impact on their relative cost
position.
To produce relatively simple standardized prodWhat kind of policy choic- ucts that will sell for
es will firms that are trying a relatively low price
to implement a cost lead- which tend to have highership strategy choose? er volumes (economies
of scale). Thus, reduces
costs even further.
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Attaining lower costs is
everyones focus which reAdvantages and Disadvantages to establishment duces costs, but can reduce the ability to meet
of a lost cost culture
customer needs.
What sources of lower
costs( cost advantage)
are MORE likely to be
rare?
-Learning curve
economies of scale (esp.
for first movers)
-Differential low-costs access to productive inputs
-Technological software
-Economies of scale (except when efficient plant
size approx. equals total
industry demand)
-Diseconomies of scale (
What sources of lower
unusual for many firms in
costs (cost advantages) industry to be producing in
are LESS likely to be rare? excess of optimal levels
-Economies of scale
-Technological hardware
(machine, robots, can be
bought by anyone in sold
on an open market)
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-Policy choices ( very readily observable)
-Scale economies ( Firms
can readily adjust their level of production)
-Scale diseconomies
(Firms can quickly skink
What are the sources of
operations to become
lower costs (cost advanmore efficient if experitages) that are easier to
ences diseconomies, howimitate?
ever this doesn't happen
very often because managers are unaware that
costs have increased due
to diseconomies)
-Learning curve effects
(Typically easy to duplicate because its not
proprietary HOWEVER,
some firms are especially good/bad at learning
from experience. organization culture that is social
complex.)
-Technological hardware
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What are the sources
of lower costs (cost advantages) that may be
hard/costly to imitate?
(typically easy to duplicate
because frequently sold
on the open market. HOWEVER, sometimes hardware can be bundled
with other unique, costly-to-duplicate resources
controlled by a firm which
can be costly to duplicate.)
-Policy choices (typically
easy to duplicate because
readily observable, HOWEVER, a series of policy
choices over history and
implication of those choices can be hard to imitate.)
-Differential access to
low-cost productive assets
-Technological software(
What are the sources of
values, beliefs, cullower costs (cost advanture, teamwork) (oftages) tat are COSTLY to
ten built on socially
Duplicate?
complex resources/competences;culture focused
on cost reduction...exam11 / 13
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ple walmart and southwest)
Sources of cost advantages discussed so far are
at least partial substitutes
for each other. One firm
may reduce cost through
exploiting economies of
scale while another may
do so by exploiting learning curve economies. If
these have similar effects
on cost position and are
Substitutability of sources equally costly to impleof cost advantage
ment, then they are strategic substitutes for each
other.
Sometimes firms simultaneously pursue all of them.
Implementing this bundle
may have a few substitutes, if they are also rare
and difficult to imitate, then
become source of sustained competitive advantage.
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-Tight cost control systems (frequent, detailed
cost control reports)
-Quantitative cost goals
Management controls re-Close supervision of laquired for cost leadership
bor, raw material, inventory, and other costs.
-A cost leadership philosophy (walmart;less formal)
-Reward for cost reduction
-Incentives for all employCompensation polices for
ees to be involved in
cost leadership
cost reduction. i.e. walmart
shirnkage.
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