5.cost advantage strategies grenoble
TRANSCRIPT
8/9/2019 5.Cost Advantage Strategies Grenoble
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Accréditations
Cost Advantage Strategies
Dr Mohamed Djeddour
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Accréditations
Cost Advantage
• Economies of experience curve and the benefits of market share
• Sources of cost advantage
• Using the value chain to analyze costs
• Current approaches to cost efficiency
OUTLINE
OUTLINE
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Accréditations
The Experience Curve
The “Law of Experience”
The unit cost value added to a standard productdeclines by a constant % (typically 20-30%) each
time cumulative output doubles.Cost per unit of
output (inreal $)
Cumulative Output
1994
1995
1996
1997
1998
1999 2000
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Examples of Experience Curves
100K 200K 500K 1,000K 5 10 50
Accumulated unit production Accumulated units
(millions) (millions)
1960Ye
n
15K
20K
30K
PriceIn
dex
50
100
200
300
70% slope
75%
Japanese clocks & watches, 1962-72 UK refrigerators, 1957-71
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The Importance of Market Share
BUT : - Association does not imply causation
- Costs of acquiring market share tend to offset the returns to marketshare
If all firms in an industry have the same experience curve, then:
relative costs = f (relative market share)
This is supported by PIMS data:
ROS(%)
-20
5
10
0-10 10-20 20-30 30-40 over 40Market Share (%)
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Drivers of Cost Advantage
PRODUCTION TECHNIQUES
PRODUCT DESIGN
INPUT COSTS
CAPACITY UTILIZATION
MANAGERIAL/ ORGANIZATIONALEFFICIENCY
ECONOMIES OF LEARNING
ECONOMIES OF SCALE
• Organizational slack
• Ratio of fixed to variable costs• Costs of installing and closing capacity
• Location advantages• Ownership of low-cost inputs
• Bargaining power • Supplier cooperation
• Design for automation• Designs to economize on materials
• Mechanization and automation
• Efficient utilization of materials• Increased precision
• Increased dexterity• Improved coordination/ organization
• Indivisibilities• Specialization and division of labor
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Accréditations
Economies of Scale: The Long-RunCost Curve for a Plant
Units of outputper periodMinimum
Efficient
Plant Size
Cost per unit of output
Sources of scale economies:
- technical input/output relationships
- indivisibilities
- specialization
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The Costs of Product Development:New Autos of the 1990s
$ billion
Ford Escort (1997 model) 2
Ford Mondeo/ Contour 6
Ford Taurus (1996 model) 2.8GM Saturn 5
Chrysler Neon 1.3
Honda Accord (1997 Model) 0.6
Renault Clio (1999 model) 1.3
Rolls Royce (1998 Silver Seraph) 0.33
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Scale Economies in Advertising: U.S. Soft Drinks
Despite the massive advertising budgets of brand leaders Coke and Pepsi,smaller brands which incur the highest advertising costs per unit of sales
Coke
Seven up
Diet Pepsi
10 20 50 100 200 500 1,000
Annual sales volume (millions of cases)
Advertisi ng
Expenditure($
per
cas
e)
0.02
0.05
0.10
0.15
0
.20
Pepsi
Dr. Pepper Sprite
Fresca
Diet Rite
Diet 7-Up
SchweppesSF Dr. Pepper
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Cost Advantage in Short-Haul Passenger Air Transport
Costs per Available Seat-Mile (1993)
Southwest Airlines United Airlines(cents) (cents)
Wages and benefits 2.4 3.5
Fuel and oil 1.1 1.1Aircraft ownership 0.7 0.8
Aircraft maintenance 0.6 0.3
Commisions on ticket sales 0.5 1.0
Advertising 0.2 0.2
Food and beverage 0.0 0.5
Other 1.7 3.1
Total 7.2 10.5
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Key Stages in Applying the Value Chain to CostAnalysis: The Case of Automobile Manufacture
STAGE 1. IDENTIFY THE PRINCIPLE ACTIVITIES
STAGE 2. ALLOCATE TOTAL COSTS
PURCH-ASING
PARTSINVEN-TORIES
R&DDESIGN
ENGNRNG
COMPONENTMFR
ASSEMBLYTESTING,QUALITY
CONTROL
GOODSINVEN-TORIES
SALES&
MKITG
DISTRI-BUTION
DEALER &CUSTOMERSUPPORT
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Applying the Value Chain to Cost Analysis(continued)
PURCH-ASING
PARTSINVEN-TORIES
R&DDESIGN
ENGNRNG
COMPONENTMFR
ASSEMBLYTESTING,QUALITY
CONTROL
GOODSINVEN-TORIES
SALES&
MKITG
DISTRI-BUTION
DEALER &CUSTOMERSUPPORT
--Plant scale for each -- Level of quality targets -- No. of dealerscomponent -- Frequency of defects -- Sales / dealer
-- Process technology -- Level of dealer -- Plant location support-- Run length -- Frequency of defects-- Capacity utilization under warrenty
Prices paid --Size of commitment -- Plant scale --Cyclicality &depend on: --Productivity of -- Flexibility of production predictability of sales-- Order size R&D/design -- No. of models per plant --Customers’--Putchases per --No. & frequency of new -- Degree of automation willingness to wait
supplier models -- Sales / model-- Bargaining power -- Wage levels
-- Supplier location -- Capacity utilization
STAGE 3.
IDENTIFY
COST
DRIVERS
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Applying the Value Chain to Cost Analysis (continued)
Consolidation of orders to increasediscounts, increases inventories
Designing different models aroundcommon components and platforms
reduces manufacturing costs
Higher quality parts andmaterials
reduces costs of defectsat later stages
Higher quality in manufacturingreduces warranty costs
STAGE 4. IDENTIFY LINKAGES
STAGE 5. RECCOMENDATIONS FOR COST
REDUCTION
PRCHSNG PARTS R&D COMPONENT ASSMBY TESTING GOODS SALES DSTRBTN DLR
INVNTRS DESIGN MFR QUALITY INV MKTG CTMR
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Recent Approaches to Cost Reduction
Dramatic changes in strategy and structure
to adjust to the business conditions of the 1990’s
Key elements:
• Plant closures
• Outsourcing
• Delayering and cuts in administrative staff
The fundamental rethinking and radical
redesign of business processes to achieve
dynamic improvements in performance. e.g.:-
• Several jobs combined into one
• Steps of a process combined in natural order
• Minimizing steps, controls, and reconciliation
• Use case managers as single points of contact
• Hybrid centralization/ decentralization
CORPORATERESTRUCTURING
BUSINESSPROCESS
REENGINEERING