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 Cost Advantage Advantage OUTLINE 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 The The Experience Experience Curve Curve The Law of Experience 1992 The unit cost value added to a standard product declines by a constant typically 20- 30 each time cumulative output doubles. 1994 Cost per unit of output in 1996 real 1998 2000 2002 2004 Cumulative Output Examples Examples of of Experience Experience Curves Curves Japanese clocks amp watches 1962-72 UK refrigerators 1957-71 50 100 200 300 20K 30K Price Index 1960 Yen 75 15K 70 slope 100K 200K 500K 1 000K 5 10 50 Accumulated unit production Accumulated units millions millions The The Importance Importance of of Market Market Share 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 10 ROS -2 0 5 0-10 10-20 20-30 30-40 over 40 Market Share BUT - Association does not imply causation - Costs of acquiring market share offset the returns to market share Drivers Drivers of of Cost Cost Advantage Advantage ECONOMIES OF SCALE Indivisibli ties Specialization and division of labor ECONOMIES OF LEARNING Increased dexterity Improved organizational routines Process innovation PRODUCTION TECHNIQUES Reengineering business processes PRODUCT DESIGN Standardizing designs amp components Design for manufacture Location advantages INPUT COSTS Ownership of low-cost inputs Non-union labor Bargaining power CAPACITY UTILIZATION Ratio of fixed to variable costs Speed of capacity adjustment RESIDUAL EFFICIENCY Organizational slack Motivation amp culture Managerial efficiency Economies Economies of of Scale Scale The The Long-Run Long-Run Cost Cost Curve Curve for for aa Plant Plant Sources of scale economies - technical input output relationships - indivisibilities - specialization Cost per unit of output Units of output
