Chapter 2 Flashcards
Which concepts in microeconomics are fundamental to business strategy
Horizontal bounderies
Economies of scale
Economies of scope
What is the definition of Economies of scale
The production process for a specific good or service exhibits Economies of Scale over a range of output when Average Cost (Cost per unit per output) declines over that range.
What is the definition of Diseconomics of scale
When the Average cost increases over a range of output.
What does a Average cost curve capture
An average cost curve captures the relationship between average costs and output.
What happens when a average cost curve is L-shaped
When capacity does not prove to be constraining, average costs may not rise as they do in an U-shaped cost curve. Output equal to or exceeding minimum efficient scale (MES) is efficient from a cost perspective.
What happens when a average cost curve is U-Shaped
Average costs decline initially as fixed costs are spread over additional units of output. Average costs eventually rise as production runs up against capacity constraints.
What is the definition of Economies of Scope
Economies of Scope exist if the achieves savings as it increases the variety of goods and services it produces.
What is the most common source of Economies of Scale
The spreading of fixed costs over an ever-greater volume of output.
What are indivisibilities
Indivisbility means that an input cannot be scaled down below a certain minimum size, even when the level of output is very small.
Explain Economies of Scale due to spreading of product-specific Fixed costs
For example setting up an production line for aluminimum cans. A single line can cost about 50 million euros. But the average fixed cost on that falls as output increases.
Explain Economies of Scale due to Trade-offs among alternative technologies
For example setting up a production line for aluminimum cans and instead of using a fully automated production line, a partially automated line because that is cheaper.
Reductions in average costs due to increases in capacity utilization are…
Short-run Economies of scale
Reductions in average costs due to an adoption of technology that has high fixed costs but lower variable costs are…
Long-run Economies of scale
When do we say that production is capital intensive
When the costs of productive capital such as factories and assembly lines represent a significant percentage of total costs.
Why is productive capital a source of scale economies?
Because it is indivisible
When do we say that production is materials/labor intensive
When most production expenses go to raw materials or labor
Substantial product-specific economies of scale are likely when…
Production is capital intensive
Minimal product-specific economies of scale are likely when…
Production is materials or labor intensive
What are the special sources of Economies of Scale and Scope
Economies of density
Purchasing
Advertising
Research and development
Physical properties of production
Inventories
Describe Economics of Density
The Economics of density refer to cost savings that arise within a transportation network due to a greater geographic density of customers. (Example: An airline’s unit costs decline as more passengers are flown over a given route, or selling beers in densely populated area compared to a sparsely populated area.)
Describe Economics of Purchasing
The Economics of purchasing refer to the conventional wisdom that purchasing power through bulk buying invariably leads to discounts.
Here are three scenarios where that can happen:
1. It is less costly to sell to a single buyer
2. A bulk purchaser has more to gain from getting the best price
3. The supplier may go bankrupt if it fails to do business with a large purchaser
Describe Economics of Advertising
Larger firms may enjoy lower advertising costs per consumer either because they have lower costs of sending messages per potential consumer or because they have higher advertising reach
What is umbrella branding
For example; an advertisement for a samsung phone may encourage customers to consider products made by samsung
Describe Economics of Research and development
All firms can lower average costs by amortizing R&D expenses over large sales volumes, but does not imply that larger firms are more innovative smaller firms.
Describe Economics of Physical properties of production
Economies of scale may arise because of the physical properties of processing units. Oil pipelines are an excellent example of this in regards to cube-square rule. The cost of transporting oil is an increasing function of the friction between the oil and the pipe. The average cost of a pipeline declines as desired throughput increases
Describe Economics of Inventories
Inventory costs are proportional to the ratio of inventory holdings to sales. The need to carry inventories creates economies of scale because firms doing a high volume of business can usually maintain a lower ratio of inventory to sales while achieving a similiar level of stock-outs
What are complementarities
Complementaries describe synergies among organisational practices. Practices display complementaries when the benefits of introducing one practice are enhanced by the presence of others. For example southwest strives for a 30 min turnaround time, therefor it does not cater it flights.
What is a other term for complementaries
Strategic fit
What is strategic fit essential for
To seek long term competitive advantage
What are diseconomies of scale
Labor cost and firm size
Spreading specialized resources too thin
Bureacracy
What is the definition of the learning curve
The learning curve refers to advantages that flow from accumulating experience and know-how
Give an example why you don’t need economies of scale to realise learning economies
This is the case in complex labor-intesive activities, like the practice of the antitrust law
What are conglomerates
Firms that involved in urelated diversification
Give efficiency-based reasons for diversification
Scope economics
internal capital markets
Give problematic justifications for diversification
Diverifying shareholders portfolios
Identifying undervalued firms
What is the winners curse
The firm with the most optimistic assessment of the target’s value will win in the bidding. Given that all other bidder’s estimates of the target’s value are below the final purchase price, it is likely that the winner has overpaid.
High marketshare / High market growth
Rising star
Low marketshare / High market growth
Problem child
High marketshare / Low market growth
Cash cow
Low marketshare / Low market growth
Dog
What is the BCG growth matrix
The matrix distinguishes a firm’s product lines on two dimensions: growth of the market in which the product is situated, and the product’s market share relative to the share of its largest competitors. It is used to allocate working capital within conglomerates.
Reasons not to diversfy
That well performing divisions have to pay for losing divisions
That a uniform organisational design hurt certain business units which benefit from other organisational designs
Managerial Reasons for diversification
Managers want to diversify because they like running larger firms
Problems of corporate governance
What is the overall concensus of diversified firms
They have consistently failed to find significant value added from diversification.
