How do economies (and diseconomies) and minimum efficient scales affect choices in strategic positioning?
In order to achieve economies of scale, a firm must be able to control and minimize their fixed costs, variable costs, marginal costs, total costs, and the average costs (Carpenter, & Sanders, 2008). Ultimately, economies of scale are achieved when the average cost is lower at higher outputs. Economies of scale affect the choices in strategic positioning by encouraging a firm to reduce its production costs, grow in size and become a “large” company (Celli, 2013). By large, the author implies mass production and volume sales through differentiation in cost to the consumer. Firms should take caution in ensuring that diseconomies of scale, which occurs when average costs increase at higher output (Carpenter, & Sanders, 2008). In terms of choices in strategic positioning, a firm will have to adjust their strategy if diseconomies of scale are realized. Obviously, there are threats to the firm in economies of scale and diseconomies of scale so the text suggests finding the minimum efficient scale. A firm can achieve the minimum efficient scale through analyzing their operations and developing a scale, such as a u-shaped scale, to determine the minimum efficient scale which is found at the point between the decreasing costs as sales increase and the increasing costs as scale increases (Carpenter, & Sanders, 2008, p. 142).
In summation, the different scales affect the choices in strategic positioning by driving a firm to choose if, and how, they want to achieve economies of scale. Of course, a firm can choose not to achieve the economies of scale and offer a higher-cost, lower level production quantities if that is their target segment.
What effects do economies of scope have?
Economies of scope refers to the strategy of a firm to offer more than one product or service in order to lower the total average cost (Carpenter, & Sanders, 2008). The effect that economies of scope have on a firm is that it allows the firm to spread their costs over several products rather than just one product. The Carpenter and Sanders (2008) text uses the example of a table manufacture that used their excess capacity to manufacture chairs, thereby achieving economies of scope (p. 143). I have used a similar concept to achieve cost reduction through outsourcing a manufacturing process. I found a company that owned similar machines that we use to cut and manufacture parts for our product. The company had excess capacity on their machines so we were able to outsource part of our manufacturing to them. We achieved significant savings because we reduced the labor cost associated with manufacturing the parts in-house, and the vendor that we worked with was able to achieve economies of scope because they were able to utilize idle machines.
How do learning curve factors affect your strategy?
Learning curves affect a strategy in that the cost associated with the learning curve must be considered when developing a strategy. The Carpenter and Sanders text (2008) provides a couple of examples of how to integrate the costs associated with the learning curve into your strategy. The first example is the Japanese auto and motorcycle manufacturers that used their future cost estimates to enter the US market (Carpenter, & Sanders, 2008, p. 143). Rather than enter the US market with a high cost and create a barrier for themselves, they took their learning curve into consideration and set their pricing based on future cost even though it was lower than their current cost; short term sacrifices for long term gains. This strategy helped them make rapid gain in the market share (Carpenter, & Sanders, 2008).
The next example that the text provided is a fictional bicycle manufacture that determined the cost reductions of their bikes as they produced more bikes (Carpenter, & Sanders 2008). Using their initial data, they were able to determine their cost of producing more bikes and offer a discount to their customer that wanted to buy 100 bikes. Again, they gained an understanding of their learning curve and factored it into their costs and used it to make a sizeable sale.
What consideration should be given to the drivers of differential advantage?
Drivers of differential advantage contain one or more of the following factors: premium brand image, customization, unique styling, speed, more convenient access, and unusually high quality (Carpenter, & Sanders, 2008). Great consideration should be given to these factors since they drive differentiation. Achieving one or more of these factors increases a customer’s willingness to pay, which is the principle of differentiation in which customers are willing to pay more for a product because of its features. BMW, for example, uses design, technology, and aesthetics to create their differentiation (Farhana, & Bimenyimana, 2015). BMW is a luxury brand with a historic reputation for high quality cars with high performance capabilities. What I can appreciate about the car company is that they provide a high level of workmanship and detail in their cars.
Thank you.
Carlos Bernal
References
Carpenter, M.A., & Sanders, W.G., (2008). Strategic Management: A Dynamic Perspective –
Integrated Stratsim Simulation Experience. Upper Saddle River, NJ: Pearson Prentice Hall.
Celli, M., (2013). Determinants of economies of scale in large businesses – a survey of UE listed
firms. American Journal of Industrial and Business Management. 3, pp. 255-261. Retrieved from https://file.scirp.org/pdf/AJIBM_2013062411490253.pdf
Farhana, M., & Bimenyimana, E., (2015). Design driven innovation as a differentiation strategy
– in the context of automotive industry. Journal of Technology Management & Innovation. 10(2), pp. 24-38. Retrieved from https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0ahUKEwi17JKZpKbZAhUEH6wKHYw8DI4QFgg5MAE&url=https%3A%2F%2Fjotmi.org%2Findex.php%2FGT%2Farticle%2Fdownload%2F1675%2F962&usg=AOvVaw0gGxkVfmpv_rR5doZ9XF0v
