Chapter 8 - Cost advantage. This chapter presents the following content: Economies of experience curve and the benefits of market share, sources of cost advantage, using the value chain to analyze costs, current approaches to managing costs. | Cost Advantage Economies of experience curve and the benefits of market share Sources of cost advantage Using the value chain to analyze costs Current approaches to managing costs OUTLINE 9 The Experience Curve The “Law of Experience” The unit cost value added to a standard product declines by a constant % (typically 20-30%) each time cumulative output doubles. Cost per unit of output (in real $) Cumulative Output 1992 1994 1996 1998 2000 2002 2004 10 Examples of Experience Curves 100K 200K 500K 1,000K 5 10 50 Accumulated unit production Accumulated units (millions) (millions) 1960 Yen 15K 20K 30K Price Index 50 100 200 300 70% slope 75% Japanese clocks & watches, 1962-72 UK refrigerators, 1957-71 11 The Importance of Market Share If all firms in an industry have the same experience curve, then: Change in relative costs over time = f (relative market share) This supported by PIMS data: BUT: - Association does not imply causation - Costs of acquiring market share offset the returns to market share ROS (%) -2 0 5 10 0-10 10-20 20-30 30-40 over 40 Market Share (%) 12 Drivers of Cost Advantage PRODUCTION TECHNIQUES PRODUCT DESIGN INPUT COSTS CAPACITY UTILIZATION RESIDUAL EFFICIENCY ECONOMIES OF LEARNING ECONOMIES OF SCALE Organizational slack; Motivation & culture; Managerial efficiency Ratio of fixed to variable costs Speed of capacity adjustment Location advantages Ownership of low-cost inputs Non-union labor Bargaining power Standardizing designs & components Design for manufacture Process innovation Reengineering business processes Increased dexterity Improved organizational routines Indivisibli\ties Specialization and division of labor 13 Economies of Scale: The Long-Run Cost Curve for a Plant Units of output per period Minimum Efficient Plant Size Cost per unit of output Sources of scale economies: - technical input/output relationships - indivisibilities - specialization 14 The Costs Developing New Car Models (including plant tooling) $ billion Ford Mondeo/ . | Cost Advantage Economies of experience curve and the benefits of market share Sources of cost advantage Using the value chain to analyze costs Current approaches to managing costs OUTLINE 9 The Experience Curve The “Law of Experience” The unit cost value added to a standard product declines by a constant % (typically 20-30%) each time cumulative output doubles. Cost per unit of output (in real $) Cumulative Output 1992 1994 1996 1998 2000 2002 2004 10 Examples of Experience Curves 100K 200K 500K 1,000K 5 10 50 Accumulated unit production Accumulated units (millions) (millions) 1960 Yen 15K 20K 30K Price Index 50 100 200 300 70% slope 75% Japanese clocks & watches, 1962-72 UK refrigerators, 1957-71 11 The Importance of Market Share If all firms in an industry have the same experience curve, then: Change in relative costs over time = f (relative market share) This supported by PIMS data: BUT: - Association does not imply causation - Costs of acquiring market share offset the returns to
