STRAT 5700, CHAPTER 4 – Flashcards

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A) business-level strategies.

B) corporate-level strategies.

C) generic business strategies.

D) cost-leadership business strategy

C) Ryanair.

B) Economies of scale

A) diseconomies of scale.

D) process manufacturing.

A) High, high

D) learning-curve economies

B) diseconomies of scale.

A) Economies of scale; learning curve

B) Where diseconomies of scale are presumed to exist if a firm gets too large, there is no corresponding increase in costs in the learning-curve model as the cumulative volume of production grows.

D) not restricted to manufacturing.

B) Productive inputs

C) less than

D) technological hardware.

B) technological software.

B) policy choices.

C) price takers.

B) Firms with a low-cost position can reduce the threat of rivalry in an industry.

D) set their prices equal to competitors' prices, sacrificing some market share for increased profit margins.

A) If buyers demand increased quality or service, cost leaders can absorb these costs and may still have a cost advantage over the competition.

A) technological software

D) policy choices

B) efficient; total demand

D) In general, both economies of scale and diseconomies of scale are relatively easy-to-duplicate bases of cost leadership.

C) escalation of commitment.

A) rare, but they usually are not costly to duplicate.

C) functional organizational structure.

A) functional manager.

B) CEO.

D) close supervision of labor, raw materials,inventory, and other costs.

C) awarding employees bonuses that are equal to 50% of the total cost savings achieved based on employee suggestions and initiatives

A) tight

B) "unitary."

D) matrix

C) functional

C) relatively few

A) cost-leadership business strategy

C) size differences and economies of scale

D) managerial diseconomies.

B) escalation of commitment.

D) securing differential access to low-cost productive inputs

B) U-form structure

D) functional manager.

C) less vulnerable to the power of suppliers.

A) robots.

B) a policy choice.

Business-level strategies are actions firms take to gain competitive advantages in a single market or industry. Corporate-level strategies are actions firms take to gain competitive advantages by operating in multiple markets or industries simultaneously. A firm that chooses a cost-leadership business strategy focuses on gaining advantages by reducing its costs below all of its competitors.

are several reasons that firms producing essentially the same products can have different costs. Some of the most important of these are: (1) size differences and economies of scale, (2) size differences and diseconomies of scale, (3) experience differences and learning-curve economies, (4) differential low-cost access to productive inputs, (5) technological advantages independent of scale, and (6)policy choices.

The four reasons why economies of scale can exist include: a. Volume of Production and Specialized Machines. When a firm has high levels of production, it is often able to purchase and use specialized manufacturing tools that cannot be kept in operation in small firms. b. Volume of Production and the Cost of Plant and Equipment. In some industries, the cost of building manufacturing operations per unit of production is lower than the cost of building smaller manufacturing operations per unit of production. Thus large-volume firms, other factors being equal, will be able to build lower per unit cost manufacturing operations and will have lower average costs of production. c. Volume of Production and Employee Specialization. High volumes of production are also associated with high levels of employee specialization. As workers specialize in accomplishing a narrow task, they can become more and more efficient at this task, thereby reducing their firm's costs. d. Volume of Production and Overhead Costs. A firm with high volumes of production has the luxury of spreading its overhead costs over more units and thereby reducing the overhead costs per unit. The four reasons why diseconomies of scale can exist include: a. Physical Limits to Efficient Size. There are some important physical limitations to the size of some manufacturing processes and when these limitations are reached, additional volume increases can lead to higher per unit costs. b. Managerial Diseconomies. As a firm increases in size, it often increases in complexity, and the ability of managers to control and operate it efficiently becomes limited. c. Worker De-Motivation. As firms become larger, employee specialization increases. With specialization, workers become more and more efficient at the particular task facing them. However, very specialized jobs can be very de-motivating for employees and productivity and quality both suffer, resulting in cost increases. d. Distance to Markets and Suppliers. Any reductions in cost attributable to the exploitation of economies of scale in manufacturing may be more than offset by large transportation costs associated with moving supplies and products to and from the manufacturing facility. Firms that build highly efficient plants without recognizing these significant transportation costs may put themselves in a competitive disadvantage compared to firms with slightly less efficient plants but plants that are located nearer suppliers and key markets.

The learning curve is very similar to the concept of economies of scale. However, there are two important differences. First, where economies of scale focus on the relationship between the volume of production at a given point in time and average unit costs, the learning curve focuses on the relationship between the cumulative volume of production, that is, how much a firm has produced over time, and average unit costs. Second, where diseconomies of scale are presumed to exist if a firm gets too large, there is no corresponding increase in costs in the learning-curve model as the cumulative volume of production grows. Rather, costs continue to fall until they approach the technologically lowest possible cost.

Threat of New Entrants. A cost-leadership competitive strategy helps reduce the threat of new entrants by creating cost-based barriers to entry such as economies of scale and cost advantages independent of scale. Threat of Rivalry. Firms with a low-cost position reduce the threat of rivalry. The threat of rivalry is reduced through pricing strategies that low-cost firms can engage in and through their relative impact on the performance of a low-cost firm and its higher-cost rivals.. Threat of Substitutes. Substitutes become a threat to a firm when their cost and performance, relative to a firm's current products or services, become more attractive to customers. Cost leaders have the ability to keep their products and services attractive relative to substitutes. Threat of Suppliers. Suppliers can become a threat to a firm by charging higher prices for the goods or services they supply or by reducing the quality of those goods or services. However, when a supplier sells to a cost leader, that firm has greater flexibility in absorbing higher-cost supplies than does a high-cost firm. Threat of Buyers. Powerful buyers are a threat to firms when they insist on low prices or higher quality and service from their suppliers. Lower prices threaten firm revenues; higher quality can increase a firm's costs. Cost leaders can have their revenues reduced by buyer threats and still earn normal or above-normal performance. These firms can also absorb the greater costs of increased quality or service and may still have a cost advantage over their competition. Cost leaders can also reduce the threat of buyers by deterring backward vertical integration and through large volumes of production.

Sources of cost advantage that are likely to be rare include learning-curve economies (at least in emerging industries), differential low-cost access to productive inputs, and technological "software." Even when a particular source of cost advantage is rare, it must be costly to imitate in order to be a source of sustained competitive advantage. However, learning-curve economies may not be costly to duplicate in some industries. Only differential low-cost access to productive inputs and technological software are both rare and costly to imitate, because they build on historical, uncertain, and socially complex resources and capabilities.

The most appropriate organizational structure is a functional structure, or the U-form that divides the company by major business function such as manufacturing, marketing, finance accounting, sales, etc. Each of these functions is managed by a functional manager and all functional managers' report to the chief executive officer or CEO.

Cost-leadership firms are typically characterized by very tight cost control systems; frequent and detailed cost control reports; an emphasis on quantitative cost goals and targets; and close supervision of labor, raw materials, inventory, and other costs. Less formal management control systems, such as organizational culture, also drive a cost-reduction philosophy at cost-leadership firms.

Compensation at cost-leadership firms is usually tied directly to cost-reducing efforts. Such firms often provide incentives for employees to work together to reduce costs and increase or maintain quality, and they expect every employee to take responsibility for both costs and quality.

The U-form structure (the other name for a functional organization) goes well with the cost-leadership strategy. The CEO in a U-form structure has the responsibility of formulating the strategy of the firm and the additional responsibility of coordinating the activities of the functional specialists in the firm to facilitate the implementation of the strategy. The CEO has a unique role in this structure since he/she is the only person in the organization that has a broad, multifunctional corporate perspective.