Chap 6 Cost Leadership

Cost Leadership Strategies gaining advantage by reducing its economic costs below all of its competitors.

1. What are the major sources of cost advantages? a. Size differences and economies of scale: Exist when AC(Q)↓=TC(Q)/Q↑, until reach to optimal volume of production * Volume of Production and Specialized machines: Only big volume company has the ability to buy new machines to save cost. * Volume of Production and Cost of Plat and Equipment: Volume↑, per-unit-cost manufacturing operations↓ * Volume of Production and Employee Specialization: Volume↑, employment more specialized, cost↓ * Volume of Production and Overhead Costs b. Size differences and diseconomies of scale: when other firms grow beyond the optimal firm size, a smaller firm (which a level of production closer to the optimal) may obtain a cost advantage. * Physical limits to efficient size * Managerial diseconomies: too large to manage efficiently * Worker motivation * Distance to Market and Suppliers: transportation cost is too expensive and eat up those profit. c. Experience differences and Learning-curve economies: cumulated volume of production greater experience in manufacturing a product or service cost↓ * Learning curve vs economic scale:
a) cumulated volume vs the volume at a given point in time and average units cost.
b) Optimal volume affects cost per unit vs No optimal volume affects cost per unit * The learning curve and competitive advantages: to driven down learning curve a firm needs to aggressively acquire market share. d. Differential Low-cost Access to Factors of Production: more access to factors of production (such as labor, capital, land and raw materials.) e. Technological advantages independent of scale: technological hardware and software. Software such as “the