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Chapter 4

SGMT 3000 Chapter Notes - Chapter 4: Nucor, Experience Curve Effects, Inventory Turnover


Department
Strategic Management
Course Code
SGMT 3000
Professor
Shoeb Mohammmad
Chapter
4

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CHAPTER 4: BUILDING COMPETITIVE ADVANTAGE THROUGH FUNCTIONAL LEVEL STRATEGIES
Functional level strategies: strategy aimed at improving the effectiveness of a company’s operation and its ability to
attain superior efficiency, quality, innovation, and customer responsiveness
-Distinctive competencies shape functional level strategies
ACHIEVING SUPERIOR EFFICIENCY
Simplest measure of efficiency: quantity of inputs it takes to produce a given output
-Efficiency = outputs/inputs
-More efficient company is, fewer inputs needed to produce output
-Efficient company has higher productivity and therefore lower costs than rivals
Efficiencies & Economies of Scale
-Economies of scale: reductions in unit costs attributed to a larger output
-One source: ability to spread fixed costs over a large production volume
oFixed cost: costs that must be incurred to produce a product regardless of the level of output
oKey: increase sales rapidly enough that fixed costs can be spread out over a large unit volume and
substantial scale economies can be realized
-2nd source: ability of companies producing in large volumes to achieve greater division of labor and specialization
oSpecialization = favorable impact on productivity because it enables employees to become skilled at
performing 1 task
oEx. Ford’s Model T
-Concept of scale economies Figure 4.2: as output increases, unit costs decrease
-Diseconomies of scale: unit costs increases associated with a large scale of output
oArise because of increased bureaucracy
oArise because of managerial inefficiencies
oArise because of dysfunctional political behavior
oEx. Nucor Steel and its 2 plants of 300 people instead of 1 with 600
-Managers must know extent of economies of scale and where diseconomies of scale begin to occur
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Efficiencies & Learning Effects
-Learning effects: cost savings that come from learning by doing
-Ex. labor productivity increases over time and unit costs decrease as individuals learn most efficient way to
perform particular task
-More significant when technologically complex task is repeated
-Learning effects in production setting will reduce the cost of goods of sold as % of revenues
-Diminish in importance after a period of time
oProbably only applies in industries with little change
oConsider industry and environment being discussed
-Ex. When you cut hair over time you learn more about what customers want etc.
-Output can be service or product
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Left most part of orange line should start at point A
There’s a difference between economies of scale and learning
-Be able to distinguish the 2
Increasing scale can involve learning
Efficiency & Experience Curve
-Experience curve: the systematic lowering of the cost structure and consequent unity cost reductions that have
been observed to occur over the life of a product
-Per-unit production costs for a product typically decline by some characteristic amount each time accumulated
output of the product is doubled
-Economies of scale and learning effects underlie experience curve phenomenon
-As company increases accumulated volume of its output over time, it’s able to realize both economies of scale
and learning effects
-Important in industries that mass produce a standardized output
-Firm that wishes to become more efficient and lower its cost structure must try to move down experience curve
quickly
-Experience curve likely to bottom out at some point
-Cost advantages gained from experience effects can be made obsolete by development of new technologies
Efficiency, Flexible Production Systems & Mass Customization
-Lower cost structure, through mass production of a standardized output, is best way to achieve high efficiency
-Wide product variety makes it difficult to increase production efficiency and reduce unit costs
-Way to increase efficiency and lower cost structure is to limit product variety and produce standardized product
in large volumes
-Flexible production technology: range of technologies designed to reduce setup times for complex equipment,
increase use of individual machines through better scheduling, and improve quality control at all stages of the
manufacturing process
oAllow firm to produce wider variety of end products at a unit cost that at one time could be achieved
only through mass production of a standardized output
oMass customization: the use of flexible manufacturing technology to reconcile two goals that were once
though to be incompatible: low cost, and differentiation through product customization
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