Week 4 - part 1 Flashcards
What is a cost advantage strategy?
A firm reduces its prices below all of its competitors thereby allowing it to gain market share
or
A firm may choose the same price as competitors which results in greater profits, better position than competitors
What are the 5 sources of cost advantage?
Economies of Scale or Scope
Learning and Experience
Proprietary Knowledge
Input Costs
Different Business Model
Economies of Scale
Producing goods or services in large quantities can help to reduce the cost of production per unit
reduction of average costs that occur from increasing the output of a single product line
- Ability to spread fixed costs of production (high volume, fixed machinery / costs of production) lowers cost per unit
- Ability to spread Non Production costs, high r&d costs = expand globally, advertising = fixed cost, general and admin cost
- Specialization of machines and equipment
Learning and Experience
As firms gain experience in producing a product or service, they become more efficient, resulting in lower costs. This can be achieved through continuous process improvement, training programs, or other means to enhance skills and knowledge.
Proprietary Knowledge
Firms that possess specialized knowledge or expertise can leverage this knowledge to reduce costs. This can be achieved through research and development, patents, trade secrets, or other means of protecting intellectual property.
Input costs
Reducing production costs (labour or raw materials) by outsourcing or investing in new technologies.
Companies that can access lower cost inputs, such as labor or raw materials, can reduce their production costs. This can be achieved by sourcing inputs from low-cost countries or regions, negotiating favorable supply contracts, or by investing in new technologies or processes to reduce input costs.
Some companies may have lower input costs than others due to:
great bargaining power over suppliers or labor
superior cooperation with suppliers
sourcing from low-cost location
preferred access to inputs
Different business model
A decision made in order to operate efficiently, with lower costs to achieve cost advantage
Companies that can adopt a different business model that allows them to operate more efficiently and with lower costs than their competitors can achieve a cost advantage. This can be achieved through various means, such as eliminating activities or steps in value chain or using a different set of activities altogether may allow a firm to deliver a product or service at lower cost
Economies of scale produce cost advantage by allowing firms to
- better spread the fixed costs of production across more units (fixed plant and equipment price)
- spread non-fixed costs across more units and or/
- invest in the specialization of machines and employees that lower per unit costs of production
Learning produces costs advantages by…
improving employees’ efficiency and effectiveness
A learning curve shows…
Labor cost per unit decrease, cumulative volume of production increase
reductions in labor costs per unit as cumulative volumes of production increase. A similar analysis that considers all costs produces an experience curve.
A scale curve shows…
Shows how a company’s cost change as production volume increase, holding other factors constant
An experience curve shows…
Shows how a company’s cost change as it gains experience in producing a product or providing a service holding other factors constant.
Scale and experience curve analysis are useful for…
making all kinds of decisions
- making investment/growth decisions
- making pricing decisions
- analysis a company’s relative cost position and looking for opportunities to reduce costs
- making acquisition changes
What is the experience curve logic?
It suggests that the company with the highest share of an industry’s cumulated output will also be the lowest cost producer
What does not typically result in higher profits
buying market share
grow volume
through increases in advertising
lowering prices
