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25 Cards in this Set
- Front
- Back
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4 major sourecs scale and scope econ
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1. Indivisibilities and spreading of fixed costs
2. specialisation 3. saving on inventories 4. cube square rule |
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indivis and fixed costs
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- indivis lead to fixed costs and thus econ of scale and scope
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what level may scale econ obtain at
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1. product lvl
2. plant level |
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what fixed costs may arise at product lvl?
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1. R&D
2. specialised equip for pdn 3. set up costs 4. training expenses therefore econ of scale created as larger pdn volumes allow fixed costs to be spread over more units of O |
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at plant lvl?
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arise due to choice of pdn tech --> indivis in productive capital (e.g. factories and assembly lines)
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specialisation
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investment and larger mkts supper specialised activities --> but O must be big enough for firms to take advantage of econ of scale
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inventories fixed costs
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drive up AC --> risk of depreciation while unsold + interest on expenses borne in producing invent
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inventories and econ of scale
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invent C are proportional to ratio of invent holdings to sales --> bigger firms hold smaller invent -> reduces AC and creates econ of scale (based on queuing theory)
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cube square rule
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volume incr, surface area by not as much
econ of scale arise because of physical properties of processing units --> pdn capactiy if proportional to volume while C is proportional to surface area implies that as capacity ine, AC of producing decreases (because ratio of surface area to volume is decreasing) --> therefore firms expand capacity without increases in costs |
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4 sources not related to pdn for scale and scope?
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1. purchasing
2. advertising 3. R&D 4. complementarities and strategic fit |
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purchasing
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bulk buying = discounts, bigger firms more price sensitive
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advertising
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C per consumer = C per potential consumer + proportion of potential consumers who become actual consumer
can be source of econ of scale cos: large firms have lower costs and better reach |
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umbrella branding
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established brand with desired image introduces new products
drawbacks: conflicting brand images may cause diseconomies of scope (bad name) |
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R&D
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positive spillovers therefore major source for econ of scope
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strategic fit
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complementarities (syngeries among organisational practices) that yields econ of scope (think airline example)
! renders piece meal copying by rivals ineffective ! essential for longterm competitive advantage over rivals |
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sources of disecon of scale
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1. increasing labour costs
2. spreading specialised resources too thin 3. conflicting out 4. incentive and coordination effects |
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labour cost
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- workers in large firms tend to get paid more + greater benefits
offsets: 1. large firms have lower worker turnover 2. large firms may be more attractive to highly qualified, upwardly mobile workers |
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specialised resources
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AC of pdn may rise when certain resources are limited in availability --> restricts ability to duplicate successes in multiple venues
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conflicting out
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limited by potential conflicts of interest --> sharing of sensitive information may lose customers
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incentive and coordination effects
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large firms:
- difficult to monitor/communicate workers - difficult to evaluate and reward individual performance - rules may stifle creativity therefore limit on growth of firm |
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learning curve
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some advantages from scale econ = learning curve/learning economies
- depend on cumulative O (not rate of O) - learning leads to lower C, higher quality, and more effective P and marketing diff from econ of scale: reductions in units costs due to ACCUMULATION of experience OVER TIME --> scale is particular POINT IN TIME |
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learning curve as measure
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- eventually flattens out and becomes 1 (no learning)
usually 0.7 - 0.9 |
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how do firms use learning curve as strategic advantage?
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expand O rapidly to benefit from learning curve and achieve cost advantage
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growth share matrix
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rising star, problem child, cash cow, dog
cash cows fund rising star and problem childs, which in turn become cash cows |
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organisational learning
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management of staff important:
1. information sharing 2. reduce turnover |
