5.Cost Advantage Strategies Grenoble

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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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

5.Cost Advantage Strategies Grenoble

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