The unit cost value added to a standard product declines by a constant % (typically 20-. 30%) each time cumulative output doubles.[r]
(1)Cost Advantage
Cost Advantage
• Economies of experience curve and the benefits of market share
• Sources of cost advantage
• Using the value chain to analyze costs
(2)The Experience Curve
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
1992
1994
1996
1998
2000
(3)Examples of Experience Curves
100K 200K 500K 1,000K 10 50 Accumulated unit production Accumulated units
(millions) (millions)
19 60 Y en 15 K 20 K 30 K P ri ce In d ex 50 10 0 20 0 3 00 70% slope 75%
(4)The Importance of Market Share
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 supported by PIMS data:
BUT: - Association does not imply causation
- Costs of acquiring market share offset the returns to market share
R
O
S
(
%
)
-2
0
5
10
(5)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
• Indivisibli\ties
(6)Economies of Scale: The Long-Run Cost Curve for a Plant
Economies of Scale: The Long-Run Cost Curve for a Plant
Units of output per period
Minimum Efficient Plant Size
Cost per unit of output
Sources of scale economies:
- technical input/output relationships - indivisibilities
(7)The Costs Developing New Car Models
(including plant tooling)
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