COST ADVANTAGE - COSTADVANTAGE Chapter8 Introduction

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           COST ADVANTAGE Chapter 8
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    Introduction Historically, business strategy analysis has  emphasized cost advantage as the primary  basis for competitive advantage in an industry. The focus on cost advantage reflects the  traditional emphasis by economists on price as  the principal medium of competition-competing  on price depends on cost efficiency For some industries , cost advantage is the  predominant basis for competitive advantage:  for commodity goods and services there are  few opportunities for competing on dimensions  other than cost 
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    Objectives Identify the determinants  of relative cost  within the industry or activity/cost drivers/ Assess a firm’s cost position relative to its  competitors and identify the factors  responsible for cost differentials Recommend  cost-reduction measures
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    Economies of Experience The Experience Curve In a series of studies, BCG observed  a  remarkable  regularity in the reductions in  costs/ and prices/ that accompanied increased  production.  Doubled of cumulative production typically reduced unit costs by 20 to 30 percent. Figure: The experience curve BCG summarized its observations in its  “Law of Experience”
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    The Experience Curve The unit cost of value added to a standard product declines by a constant percentage /typically between 20 and 30 percent / each time cumulative output doubles.   The experience curve became one of the best- known and most influential concepts in the the  history of strategic management.
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    The Experience Curve The relationship between unit cost and  production volume may be expressed as  follows:                           n =C 1 ∙n -a   Where,  n    is the cost of the first unit of  production;  C 1  is the cost of the  n th unit of  production;  n  is the cumulative volume of  production;  a  is the elasticity of cost with 
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    Strategy Implications: The role of  market share If costs decline systematically with  increases in cumulative output, then a  firm’s cost relative to its competitors  depend on its cumulative  output  relative to that of competitors.
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    Strategy Implications: The role of  market share If a firm can expand its output at a greater rate than its competitors, it is then able to move down the experience curve more rapidly than its rivals and can open up a widening cost differential. If Boeing holds 60 percent of the world market for large commercial jet aircraft and Airbus holds 40 percent , Boeing will reduce its costs at one –and-a half times the rate of Airbus
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    Strategy Implications The quest for economies of experience also  has important implications for pricing policy. The firm should price its products not on the
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This note was uploaded on 06/05/2011 for the course MANAGMENT 25 taught by Professor Fu during the Spring '11 term at Asbury.

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COST ADVANTAGE - COSTADVANTAGE Chapter8 Introduction

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