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Transcript

  • 1. Cost Advantage
    • Economies of experience curve and the benefits of market share
    • Sources of cost advantage
    • Using the value chain to analyze costs
    • C urrent approaches to managing c osts
    OUTLINE
  • 2. The Experience Curve The “Law of Experience” The unit cost value added to a standard product declines by a constant % (typically 20-30%) each time cumulative output doubles. Cost per unit of output (in real $) Cumulative Output 19 92 19 94 19 96 19 98 2000 2002 2004
  • 3. Examples of Experience Curves 100K 200K 500K 1,000K 5 10 50 Accumulated unit production Accumulated unit s (millions) (millions) 1960 Yen 15K 20K 30K Price Index 50 100 200 300 70% slope 75% Japanese clocks & watches, 1962-72 UK refrigerators, 1957-71
  • 4. The Importance of Market Share
      • If all firms in an industry have the same experience curve, then:
      • Change in relative costs over time = f (relative market share)
      • This implies that market share is linked to profitability. This is confirmed by PIMS data:
    BUT : - Association does not imply causation - Costs of acquiring market share offset the returns to market share ROS (%) -2 0 5 10 0-10 10-20 20-30 30-40 over 40 Market Share (%)
  • 5. Drivers of Cost Advantage PRODUCTION TECHNIQUES PRODUCT DESIGN INPUT COSTS CAPACITY UTILIZATION RESIDUAL EFFICIENCY ECONOMIES OF LEARNING ECONOMIES OF SCALE
    • Organizational slack; Motivation &
    • culture; Managerial efficiency
    • Ratio of fixed to variable costs
    • Speed of capacity adjustment
    • Location advantages
    • Ownership of low-cost inputs
    • Non-union labor
    • Bargaining power
    • Standardizing designs & components
    • Design for manufacture
    • Process innovation
    • Reengineering business processes
    • Increased dexterity
    • Improved organizational routines
    • Indivisiblities
    • Specialization and division of labor
  • 6. Economies of Scale: The Long-Run Cost Curve for a Plant Units of output per period Minimum Efficient Plant Size: the point where most scale economies are exhausted Cost per unit of output Sources of scale economies: - technical input/output relationships - indivisibilities - specialization
  • 7. The Costs Developing New Car Models (including plant tooling)
    • $ billion
    • Ford Mondeo / Contour 6
    • GM Saturn 5
    • Ford Taurus (1996 model) 2.8
    • Ford Escort (new model 1996) 2
    • Renault Clio (1999 model) 1.3
    • Chrysler Neon 1.3
    • Honda Accord (1997 model) 0.6
    • BMW Mini 0.5
    • Rolls Royce Phantom (2003 model) 0.3
  • 8. Scale Economies in Advertising: U.S. Soft Drinks 10 20 50 100 200 500 1,000 Annual sales volume (millions of cases) Advertising Expenditure ($ per case) 0.02 0.05 0.10 0.15 0.20 Coke Pepsi Seven Up Dr. Pepper Sprite Diet Pepsi Tab Fresca Diet Rite Diet 7-Up Schweppes SF Dr. Pepper Despite the massive advertising b udgets of brand leaders Co ke and Pepsi, their main brands incur lower advertising costs per unit of sales than their smaller rivals.
  • 9. Cost Advantage in Short-Haul Passenger Air Transport Costs per Available Seat-Mile Southwest Airlines United Airlines (cents) (cents) Wages and benefits 2.4 3.5 Fuel and oil 1.1 1.1 Aircraft ownership 0.7 0.8 Aircraft maintenance 0.6 0.3 Commissions 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
  • 10. Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture STAGE 1. IDENTIFY THE PRINCIPLE ACTIVITIES STAGE 2. ALLOCATE TOTAL COSTS PURCH- ASING PARTS INVEN- TORIES R&D DESIGN ENGNRNG COMPONENT MFR ASSEMBLY TESTING, QUALITY CONTROL GOODS INVEN- TORIES SALES & MKITG DISTRI- BUTION DEALER & CUSTOMER SUPPORT
  • 11. Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture (continued) PURCH- ASING PARTS INVEN- TORIES R&D DESIGN ENGNRNG COMPONENT MFR ASSEMBLY TESTING, QUALITY CONTROL GOODS INVEN- TORIES SALES & MKITG DISTRI- BUTION DEALER & CUSTOMER SUPPORT --Plant scale for each -- Level of quality targets -- No. of dealers component -- Frequency of defects -- Sales / dealer -- Process technology -- Level of dealer -- Plant location support -- Run length -- Frequency of defects -- Capacity utilization under warranty 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’ -- Purchases 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
  • 12.
    • PRCHSNG PARTS R&D COMPONENT ASSEM- TESTING GOODS SALES DSTRBTN DLR
    • INVNTRS DESIGN MFR BLY QUALITY INV MKTG CTMR
    Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture (continued) Consolidation of orders to increase discounts, increases inventories Designing different models around common components and platforms reduces manufacturing costs Higher quality parts and materials reduces costs of defects at later stages Higher quality in manufacturing reduces warranty costs STAGE 5. RECCOMENDATIONS FOR COST REDUCTION STAGE 4. IDENTIFY LINKAGES
  • 13. Dynamic vs. Static Approaches to Manufacturing PRODUCTION SYSTEM MANAGEMENT OF TECHNOLOGY DYNAMIC (Artisan Mode) STATIC (Scientific Management Mode)
    • problem solving
    • people matched to tasks
    • create employee knowledge
    • employees control production
    • customer orientation
    • quest for “one best way”
    • planning & control by staff
    • Incentives and penalties to
    • ensure conformity to
    • objectives
    • science driven
    • focused around
    • corporate R&D
    • departments
    • emphasis on big
    • projects
    • continuous, incremental
    • improvement
    • market needs pull technology
    • product and process innovation
    • teamwork and cross-
    • functional collaboration
  • 14. 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
    CORPORATE RESTRUCTURING BUSINESS PROCESS REENGINEERING