Chap 3 CM: SCALE AND SCOPE WITHIN AN INDUSTRY
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Transcript of Chap 3 CM: SCALE AND SCOPE WITHIN AN INDUSTRY
CHAP 3 CM:SCALE AND SCOPE WITHIN AN INDUSTRY
By :Candra Wahyuni PEry Ardono SHeru Agung P
AP 14 MM UGM2010
A DIMENSIONS OF SCOPEValue Chain geograp
hy
Product Market
A DIMENSIONS OF SCOPE : EXPANSION WITHIN AN INDUSTRY
For most firms, expansion begin within their original industry, by increasing the scale of out put, vertically integrating, producing closely related products, or entering new geographies
Firms often pursue such expansions proactively, to increase their size and enhance their competitive positions. In other cases, the same moves are taken reactively, to defend a firm’s position as others move to exploit scale and scope advantages
ECONOMIES OF SCALE Economies of scale exist when the average cost of producing each unit
declines as more units of a good or service are produced. Single site economies often accur in physical production processes and
are related to the size of the manufacturing unit Scale allows specialization, which may be of considerable benefit to a
firm. Multiple site economies are dominant firms that operate more than one
plant or establishment. There are more likely to be found in R&D and marketing than in the phisical production process
Multiple site firms may also benefit from economies of risk spreading and lower capital cost. Larger organization may be more successful in attracting and holding highly talented people, the cost of which can be spread across a larger volume of out put.
ECONOMIES OF SCALE : EXPERIENCE CURVE
Economies of scale refer to cost reductions that company increase in total current out put, experience curve refers to cost reductions that occur as cumulative volume rises
Experience curves emerged out of a manufacturing environment or service firms. The other factors that contributed are ongoing engineering and technical improvements
ECONOMIES OF SCALE : DIFFERENCE Scale : can be quickly replicated by
building a large plant experience : must built through time,
effect are classic examples of path dependency, difficult to transfer knowledge across location even within a firm, extent that competence of first hand experience if individual.
LIMIT TO SCALE AND EXPERIENCE Cost decline indefinitely as scale and experience
doesn’t continue to rise. Some time it is posible, but many not smooth fuctions. Physical properties often limit efficiency gains beyond certain level
There are also strategic risks to consider. Exploiting scale economies requires considerable investment, often specialized assets, if taste change, these sunk investment may lock a firm into an unattractive strategy and not be recovered
It is not unusual fot the magnitude of scale economies to shift over the life of an industry
WHEN THEY EXISTS? Network externalities exist when customer’s
valuation of a product increases as more customers buy or use the good or service
Economies of scale exist when average cost declines as good or service is produced or sold in larger volume
Economies of scope exist when the cost of producing and selling multiple products together is lower than the cost of producing and selling the same quantity of goods individually
ECONOMIES OF SCOPE The size and scope of a firm is influenced not only by the
scale economies of various activities, but also by the presence of the cost saving across functions or units
Economies of scope exist when it is less costly to combine two or more product lines in one firm than to produce them separately
Economies of scope may be occuring in activities that are not directly related to the physical production process, including research and development, sales marketing, distribution, transportation, and overhead.
The role intangible resources in scope economies has recently received considerable attention. Example : firm’s reputation, umbrella branding, creation of competences
ADVANTAGE OF SCOPE ECONOMIESCorporate Scope
Shared facilities, logistic, and purchasingCommon
technologyShares operating
skills
Common customerCommon channels
Brand value
Business unit competitive advantage *Lower cost
*hingher quality
production
marketing
NETWORK EXTERNALITIES Network externalities is a source of
advantage that encourages a firm to expand within an industry.
Network externalities increase demand for the product or the service of the large player and or early mover
Effect of network externalities are positive feedback, winner takes all, system is open or closed
OBSTACLES TO EXPLOITING SCALE AND SCOPE
Simply increasing the volume of a business in no sense guarantees that firm’s cost structure will improve
Combining two related business lines does not mean that product quality will improve or cost will decline
OBSTACLES TO EXPLOITING SCALE AND SCOPE
Some firms simply miscalculate the size of scale or scope benefits that a given strategy may yield. Exploiting scale economies can substantially increase the size of organization, complicating administrative functions and producing buureaucratic inefficiencies. Scope economies often require profound changes in organizational structure and system because they depend on sharing of resources and some level of coordination across previously separate units
OBSTACLES TO EXPLOITING SCALE AND SCOPE
Firms can also fail to exploit scale ar scope economies that emerge in an industry because they locked into a given way competing
Institutionalized capabilities can lead to inertia as the experience of two companies. The double edged quality of resources : on a firm’s ascedancy, they can shield the firm from competition and make it difficult for rival to close in on its lead, but when strategy in eventually challenged, they can block the firm’s own ability to respond
THE SEARCH FOR SCALE AND SCOPE EFFECTS
Firms often expanding into market segments that appear to be related to their existing business, but in fact are quite different.
Firms tend to make this mistake when they define relatedness on the basis of product characteristics rather than on resources
Segment in an industry can have different key success factors that prevent the exploitation of scale and scope economies
THE SEARCH FOR SCALE AND SCOPE EFFECTS
First, identified managerial impediments t the achievement of scale and scope economies
Observe the failure of scale and scope effect to materialize because management misjudged their potential from the start.
This often occurs when expansion is based on an impressionistic assessment rather than a more careful analysis of the source and magnitude of expected cost savings
IDENTIFYING SCALE AND SCOPE EFFECTS
Data driven analyses of the effect of scale. Such careful work can go a long way to quantify the extent of scale economies in a business
Experience curves can be constructed and their slope calculated from data on the past out put of a firm or industry
To evaluate the potential for scope economies between two or more business segments, manager also need a systematic process. This analysis focus on the specific resources and activities that, through combination, may lead to advantage
The value chain, which divides a firm’s activities into discrete process, provides a useful starting point for such an analysis.
Listing all the discrete activities in the value chains of two business or segments under consideration allows for an accurate identification of those that are similar enough to be subject to scope economies
Potential for scale and scope economies will differ among the various activities. Identifying and isolating activities where their effect is greatest is an important step
USING THE VALUE CHAIN The value chain use as a tool for identifying
scope economies. Eg. Industrial thermostat company decided to expand into household thermostats.
At first in glance, this might appear to be straightforward example of expansion across industry segment. The firm would remain a thermostat producer only offering an additional product line. Looking closer, however one can see that fit between the two business was not at all close
VALUE CHAIN FOR HOUSEHOLD THERMOSTATS
Firm infrastructure
Human resource management
Technology development : attractive product appearance user friendly controlsprocurement
Inbound logistics
Outbound
logistics : bulk
shipments to
product warehouses and
DIY stores
Marketing and sales :
sold by industry
representatives
Brand merchandising network
In store advertising
Service : no after m
arket service
Operation : automated mass production
margin
margin
Support
activities
Primary activities
VALUE CHAIN FOR INDUSTRIAL THERMOSTATS
Firm infrastructure
Human resource management
Technology development : one of kind customized design R&D intensive / large pool of engineersprocurement
Inbound logistics
Outbound
logistics : direct
installation
Marketing and sales : sold by in house of
engineers
Service : extensive custom
er support
Operation : built to orderStrict adherence to design specs
margin
margin
Support
activities
Primary activities
USING THE VALUE CHAIN The value chains for the two businesses
reveal these critical differences. When placed side by side, it is clear
that the resources needed to support these businesses are very different, and that there are few possibilities for scale or scope economies
CONCLUSION Vague discussion scale and scope effects are not only
unhelpful, they can be very misleading. General statements such as “substantial cost savings are
expected in overhead and marketing” are exceedingly difficult to quantify and do not provoke the kinds of questions that help managers expose inconsistencies in their thinking.
Systematic analysis and explicit effort to assess scale and scope benefit are required
As above ilustrate, scale and scope economies have no value in abstract
They create value only when they translate into material advantages for the firm