mgmt3015_week3_W.pdf - MGMT 3015 Corporate Strategy Week 3...

Info icon This preview shows pages 1–13. Sign up to view the full content.

View Full Document Right Arrow Icon
MGMT 3015 Corporate Strategy Week 3: The scope of the firm Dr. Alex Eapen Senior Lecturer Research School of Management
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
The story behind our next few sessions±±± <ey question : What are the sources of persistent profits? :ne answer : “Industry effects” In other words, the “scope of the firm” matters. Scope? Size and scale, horizontal scope, geographic scope, vertical scope :ur focus : Some antecedents and consequences of these scope decisions.
Image of page 2
Mini case: United and Continental merger - United and Continental merger https://www.youtube.com/watch?v=5nuHrOjzvMI Then: ( http://money.cnn.com/video/markets/2010/05/03/mkts_united_airlines_co ntinental_merger.cnnmoney/ or https://www.youtube.com/watch?v=H7Q9mTasTB4) Think: What do you think motivated this merger? Do you agree with the CEOs' explanation? Are you convinced?
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
"Airline mergers take several years, which I think is surprising to most people" (Jeff Smisek, CEO, United Continental Holdings) - Speed up - slow down algorithms (usually different, usually trade secrets) - Reservation and ticketing programs - Flight information systems "...information technology tends to be the thorniest part of an airline merger. .." Also, smaller, but nonetheless important issues: - Starbucks (United) or Fresh Brew (Continental) - Boarding flights: from back to front or row, middle, aisle (United)? - What direction dog crates should face when loaded into the cargo hold? - serve nuts in bags or heated in a ramekin? United – Continental merger (Businessweek Feb 6-12 2012)
Image of page 4
United )irlines Network Operations +enter /mGgHs± ,orhHs mGgGzinH %² 4ov %#$³
Image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Cost functions Will total costs change if we increase output? This is what cost functions (or curves) tell us The total cost function is the relationship between out- put and the lowest possible cost of producing a given output Total cost = Fixed cost + Variable cost Average cost = Total cost / Quantity Marginal cost = Rate of change in total cost with respect to output
Image of page 6
U-Shaped Average Cost Curve
Image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
U Shaped Average Cost curve It is useful to express AC(Q) as a sum of its fixed and variable components: AC(Q) = AFC(Q) + AV C(Q) E.g. Let total fixed costs of a firm be $10 million. And let variable costs, a function of output, be 4.Q 2 Now, AFC(Q) = 10 , and AVC(Q) = 4.Q 2 / Q = 4.Q Average cost, AC(Q), then is 10/Q + 4.Q Implication: As output increases, fixed cost component reduces (pulls the curve down) while the variable cost component increases (and pulls the curve up).
Image of page 8
U-Shaped Average Cost Curve Average cost declines as fixed costs are spread over larger volumes Average cost eventually starts increasing as capacity constraints kick in U-shape implies cost disadvantage for very small and very large firms Unique optimum size for a firm
Image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
L-Shaped Cost Curve In reality, cost curves are closer to being L-shaped than U-shaped (Johnston, 1960) Large firms are rarely at a cost disadvantage relative to smaller firms A minimum efficient size (MES) beyond which average costs are constant
Image of page 10
L-Shaped Cost Curve
Image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
A possible explanation is this: U-shaped curves exist in the short-run; firms that
Image of page 12
Image of page 13
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern