Strategic choices fall into two categories:
Cost leadership
Likely to be rare sources of cost advantage |
Less likely to be rare sources of cost advantage |
Learning curve economies to scale (especially in emerging business) |
Economies of scale (except when efficient plant size aprox. equals total industry demand) |
Differential low-cost access to productive inputs |
Diseconomies of scale |
Technological software |
Technological hardware (unless a firm has proprietary hardware development skills) |
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Policy choices |
Basis for |
costly |
duplication |
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Source of cost advantage |
History |
Uncertainty |
Social Complexity |
|
Low cost duplication |
1. Economies to scale |
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2. Diseconomies to scale |
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May be costly |
3. Learning- curve economies |
Somewhat likely |
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4. Technological “hardware” |
Somewhat likely |
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5. Policy choices |
Somewhat likely |
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Usually costly to duplicate |
6. Differential low-cost access to productive inputs |
Very likely |
Likely |
|
7. Technological software |
Very likely |
Likely |
Very Likely |
Escalation of commitment is when managers committed to an incorrect (cost increasing or revenue reducing) course of action increase their commitment to this action as its limitations become manifest. So... firms suffering from diseconomies of scale should turn to must turn to outside managers to assist in reducing costs.
Organizing to Implement Cost Leadership:
Firms implementing cost leadership will generally adopt functional organizational structure àeach major business functions is managed by a functional manager à who reports to the CEO
CEO is often called U-form structure “U” for unitary because there is only one person in this organization that has a broad multifunctional corporate perspective. U Form is kept as simple as possible.
Organizing to realize the full potential of cost leadership: |
Organizing to realize the full potential of product differentiation: |
Organization structure- functional structure with |
|
1. Few layers in reporting |
1. Cross divisional/ cross- functional product development teams |
2. Simple reporting relationshipsà complicating reporting structures, including matrix structures where one employee reports to two or more people, is usually avoided. |
2. Willingness to explore new structures to exploit new opportunities |
3. Small corporate staff |
3. Isolated pockets of intense creative efforts |
4. Focus on narrow range of business functions |
|
Management control systems |
|
1. Tight cost control systems |
1. Broad decision-making guidelines |
2. Quantitative cost goals |
2. Managerial freedom within guidelines |
3. Close supervision of labor, raw material, inventory and other costs |
3. Policy experimentation |
4. A cost leadership philosophy |
|
Compensation policies |
|
1. Reward for cost reduction |
1. Rewards for risk-taking, not punishment for failure |
2. Incentives for all employees to be involved in cost reduction |
2. Rewards for creative flair |
Responsibilities of the CEO:
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