Your SlideShare is downloading. ×
0
Chapter2
Chapter2
Chapter2
Chapter2
Chapter2
Chapter2
Chapter2
Chapter2
Chapter2
Chapter2
Chapter2
Chapter2
Chapter2
Chapter2
Chapter2
Chapter2
Chapter2
Chapter2
Chapter2
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

Chapter2

917

Published on

Published in: Business, Technology
0 Comments
2 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total Views
917
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
14
Comments
0
Likes
2
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. Horizontal Boundaries of the Firm: Economies of Scale and Scope Chapter 2
  • 2. Economies of Scale and Scope Economies of Scale The concept of economies of scale provides the primary connection between technology and firm competitive strategy Numerous definitions, but the most useful seems to be: Economies of scale exist when average cost is declining . Important to distinguish between long-run and short-run notions of economies of scale.
  • 3. Long-run : shape of the average cost curves dictated by existing state of knowledge. $ Q Minimum Efficient Scale
  • 4. Short-run: technology (quasi-) fixed and embodied in plant and capital investment (e.g. business design) $ Q Minimum Efficient Scale
  • 5. Long-run economies of scale impact industry structure and are only relevant in the pre-entry stage. Short-run economies of scale, affect operating decisions and are relevant to post-entry stage
  • 6. In essence, joint production is less costly than production of single product lines Economies of Scope Economies of scope exist when there are cost savings associated with a broadening of a firm’s scope of activities. Increases in the number of products or services produced Formally, economies of scope exist if: C( Y 1 ,Y 2 ) < C( Y 1 ,0 ) + C( 0,Y 2 )
  • 7. An example of Economies of Scope Costs of Print Message Notes and Tape Q x Q y TC(Q x , Q y ) 100m 0 $55m 0 600m $220m 100m 600m $245m 200m 0 $60m 0 1200m $340m 200m 1200m $370m
  • 8. Sources of Economies of Scale and Scope Indivisibilities and fixed-cost spreading specialization (increased productivity of variable inputs) Inventories The cube-square rule
  • 9. Indivisibilities and Fixed-Cost Spreading Spreading of product-specific costs Trade-offs among alternative technologies Indivisibilities more likely with capital intensive technology The division of labor is limited by the extent of the market
  • 10. Costs of Producing Aluminum Cans 500 million cans per year 125 million cans per year Fully Automated Average fixed costs = .01 Average fixed costs = .04 Average labor costs = .00 Average labor costs = .00 Average materials costs = .03 Average materials costs = .03 Average total costs = .04 Average total costs = .07 Partially Automated Average fixed costs = .0025 Average fixed costs = .01 Average labor costs = .01 Average labor costs = .01 Average materials costs = .03 Average materials costs = .03 Average total costs = .0425 Average total costs = .05
  • 11. Scale Advantage and Capacity Utilization $ Q SAC 1 SAC 2
  • 12. Can convey technical economies in distribution and storage Specialization Efficiency gains via specialization of function? Organizational efficiencies Inventory Management Cost of inventory management can decline with size of firm Smaller inventory as a percentage of total sales Cube Square Rule (2A 3 ) Ratio of surface area to volume declines geometrically
  • 13. Other Sources of Scale Spreading of marketing and advertising costs Reputation effects Research and development costs Purchasing economies Complementarities and Strategic Fit
  • 14. Mobilizing assets Sources of Economies of Scope Utilization of excess capacity (especially in the presence of indivisibilities) Utilization of fixed marketing/retailing costs/infrastructure Exploitation of reputation and brand identity Common terms used in (implicitly) discussing economies of scope include: Leveraging core competencies Competing on capabilities
  • 15. Spreading of Specialized Resources Sources of Diseconomies of Scale Labor Costs and Firm Size Incentive and Bureaucracy costs Conflicting Out
  • 16.   Efficient pricing or competition policies   Learning Curves Learning Curves account for the cost advantages associated with experience and know-how Can occur at the individual level Can occur at the organizational level Learning curve advantages can be manifest in: Lower costs Higher quality
  • 17. Learning Curve $ Cumulative Production AC AC 2 2Q 1 AC 1 Q 1
  • 18. Measures the decline in average cost when cumulative output is doubled. Progress Ratio PR = AC 1 /AC 2 Median for U.S. is about 0.80, which implies a reduction in unit cost of 20% for each doubling of cumulative output.
  • 19. $ Q AC 1 (Q 1 ) AC 2 (2Q 1 )

×