Posted: May 25th, 2022

Management Economies of scale

Management

Economies of scale reflects a situation where the cost of something declines when more is produced. With larger quantities, bargaining power increase, and there are opportunities for greater systems efficiency. Economies of scope reflects a cost saving when a company produces two or more goods (The Economist, 2008). For example, if McDonalds only produced Big Macs, it would be inefficient because there is not enough demand for those to keep the restaurant busy. By adding other products, the restaurant can become more efficient because it is working closer to capacity and there are always customers.

Transaction costs are the costs associated with a transaction. In some cases, there are fees and commissions that have to be paid in order to do something. Those costs do not add any value in themselves, but they are costs that are necessary to doing the transaction.

Economic Value Added (EVA) is basically the profit earned by the firm, less its cost of capital. This measure is used especially as basically a form of adjusting risk when comparing returns across different companies. The cost of capital reflects the risk of the company — higher risk companies are supposed to have higher costs of capital, and are supposed to return better. So EVA is a way of looking at returns and incorporating risk into the measure.

Strategic alliances are alliances between businesses, usually ones that have some measure of competition with each other. This creates a situation where there is a trade-off between the benefit to the companies involved and the costs associated with the alliance. An example might be Apple using Samsung parts in the iPhone, or having iTunes for Windows. Real options reflect contingencies — an option to do something (tangible) that arises from a future condition. Real options can be part of a strategic investment decision, but it difficult to price in such contingencies, other than estimating the odds of the option being exercised.

The balanced scorecard is a method by which the company evaluates its outputs on more than just financial measures. The BSC idea is that companies are a sum total of all outputs. The aspects of the BSC are financial, the customer, the business processes and the knowledge/innovation. By seeking excellence in all of these, a company can find the strategy that allows for the highest possible level of performance, where trade-offs between the output types are not necessary. Values are what the organization values — maybe which elements of the scorecard are considered to be more important.

Generic strategies is a concept that seeks to organize business strategies. Porter argued that there are basically two that work — cost leadership and differentiation. Some people feel that striking a balance can also work. These are divided into either mass market or niche (IFM, 2015). There are other conceptualizations of generic strategies. Imitation comes from one of those other frameworks, where a firm seeks to imitate an industry leader, and in that way skim some business from them, maybe by offering the imitation at a slight discount.

Segmentation is a means by which the different industries are understood. There are different bases by which segmentation can occur — by product, by firm size, etc. Strategic groups are the groups of firms that exist in each segment. One example I have read talks about the automotive industry, where the type of car forms each segment, and then strategic groups help to understand which companies compete in each segment. Companies that overlap in many segments are close competitors (Subramaniam, 1999).

Vertical integration is the system by which the company owns either parts of its supply chain or its distribution network. An example would be the Apple stores or Tesla dealerships, as forwards vertical integration. An example of backwards vertical integration would be the hop farms that Anheuser-Busch owns. Vertical integration typically offers firms greater control over critical elements of the business, which can sometimes be advantageous.

Michael Porter (2008) described the five forces as the means by which companies earn profit. These are the bargaining power of buyers, the bargaining power of suppliers, the threat of substitutes, the threat of new entrants and the intensity of rivalry within the industry. Each dynamic plays a role in defining the ability of the company to set prices at a profitable level. Complements are seen almost as the sixth force, being the companies that sell goods or services that are complementary to the product. For example, some of Apple’s pricing power relates to the massive selection of apps, relative to some other competitors (though Android is closing this gap).

Each of these concepts is a fundamental part of learning about management and strategy, so it is important to understand each, and the role that each plays in the formation and implementation of strategy.

Unit 1, Discussion Board 3

The concept of non-linear change is important to understand in management. A reliance on linear thinking is a cognitive bias, because quite frankly it is easier to think in linear terms. Using what has worked before or relying on neat and tidy linear extrapolations removes some of the complexity out of thinking and decision-making. The reality, however, is that the world is constantly changing and therefore there is at best only partial linearity. Thus, non-linear change is reality, and any manager worth his or her desk should accept the world for what it is — nonlinear, constantly changing, and a place where tunnel vision, myopic thinking and a lack of willingness to address cognitive biases are all negative traits.

The strategic manager needs to understand and accept that there is a lot of ambiguity in the world. Obviously, certainty is easier to deal with, as decisions can be made quickly, and with clarity. But those are easy decisions, and anybody could make them. The role of a top level manager is to understand things that other people cannot understand, and to make decisions under conditions that challenge others. The top level manager should handle uncertainty, ambiguity and non-linearity better than the other people in the organization, in order to be superior at the role.

The chief executive officer is at that high level. The CEO is the head of the company, and the one most responsible for determining strategy. The CEO is often the chief architect of the mission and vision for the company. The best people in this role have the ability to understand how all the different pieces of the organization fit together, and how they interact with the external environment. That is the way that the best strategy will be formed, implemented and then adjusted. The best managers have this ability. So when a manager relies on linear thinking, that is a manager whose ceiling should be inherently limited. Such a manager will have a difficult time interpreting major changes in the environment, and will struggle to adjust. To manage at a high level means to be able to handle the nonlinear change that occurs, and fit that change within the vision and mission of the company, and then make the right adjustments to strategy.

The concept of non-linear change relates well to critical thinking, something that a manager must be able to do. A manager has to be able to recognize patterns and understand what they mean, but also to recognize when the patterns have been broken. Companies sometimes struggle when they fail to adjust to changing circumstances. There are actually tools by which managers can start to think more about non-linear change, such as simulation training, where managers are asked to think about outlier events and how those will affect the company. Many outlier events are fairly predictable, but managers still struggle. Consider what happened to Toyota after the 2011 tsunami. Its supply chain was concentrated in the affected region, and was therefore disrupted. This cost the company a lot of money because managers had not anticipated what might happen if there was a major earthquake and tsunami in that region — in Japan, a country that is famously seismic. The ability to think in a non-linear manner helps managers handle the uncertainty and ambiguity of the world much better than they otherwise could.

Unit 1 Individual Project

Ford and GM have the same strategy — they provide generic automobiles for the mass market. More or less, they try to have cost leadership and differentiation within that context, and succeed at neither, which is why both of these companies have struggled a lot in the past few decades since foreign competition entered the market. A better company to choose for this would have been Tesla, which has a very different strategy than these two Big Three companies, which are very similar to each other.

Likewise, Apple and Samsung are pretty similar where they compete directly. They both are differentiated players in smartphones, having the two most technologically-advanced phones on the market, and pricing accordingly. Overall, they are differentiated on all products, but they compete in different products from each other in many cases. Apple seeks to be the most differentiated, so there is a slight difference between them, but not nearly as much as the difference between Apple and one of the low-end mobile device companies.

Coca-Cola and PepsiCo are also very similar. Again, there are companies that are highly-differentiated in soft drinks, so why look at two companies that have almost identical strategies? They both are vertically integrated, owning much of their own distribution capacity. They both have broad product ranges, seeking out economies of scope on the distribution side in particular. They both are priced higher than the budget brands, but not as high as the boutique soda companies out there. They both rely on branding for differentiation because goodness knows the ingredients aren’t that different and the drinks are both pretty terrible. One key strategic difference is that Pepsi also has Frito Lay, a major snack food company, under its umbrella. This is because while Coke has the highest market share in non-alcoholic beverages, Pepsi is the larger company overall, again a reflection of economies of scope as a point of strategy.

American and Delta are indistinguishable in terms of strategy. They are cost leaders, and the average consumer would have trouble differentiating them in terms of the actual service offered. The U.S. does not have many truly competitive discount airlines (compared with other parts of the world) so the major legacy airlines end up playing that role — pricewise there isn’t much difference between legacy airlines and the major non-legacy carriers (JetBlue, Southwest, Alaskan). They both compete based on route networks, seeking routes that deliver better options to customers, and pricing in line with the other airlines that fly the same route. It would actually be a challenge to pick two companies that are more similar in terms of strategy than these two — if you didn’t see the livery you would have no way of knowing which airline you were flying on.

FedEx and UPS continue the pattern of comparing firms that are almost alike. They started in different places — FedEx in overnight and UPS in ground, and each still leads in its respective category — but have converged significantly. They each have stores, ground, overnight, customs clearance and other logistics-related businesses, and global scope. They both price premium for the overnight, and compete as differentiated players. This is an interesting industry in that there is not much low end, unless USPS counts, so it could be viewed that overnight is differentiated and ground shipment is cost leadership. But these companies are becoming more similar all the time.

The common theme here is that these are all very large, mass market companies, which removes the ability to compare against niche firms. Pairings that included, say, Tesla, Xiaomi, Hawaiian Air, Dry Soda, and American Airlines Cargo would have created more contrast. All the large firms in the pairings also exist in near-oligopoly conditions, which has meant that they are all strategic mirrors of each other. Pepsi has legitimately benchmarked against Coke forever. FedEx and UPS has gradually converged, with the FedEx purchase of Kinko’s making that convergence official. The airlines and automakers have been run with identical strategies for decades. Apple and Samsung are probably the most different from each other, yet they have the same generic strategy; they merely differ in execution. So there is a reason that firms of the same size, in the same business, where that business is a near oligopoly or actual oligopoly, have the same strategy, because that is normal under oligopolistic conditions, where firms must undertake competitive strategy with their closest competitors in mind.

Unit 1, DB 2

My research is to explore what we presently know, and determine future directions based on what we do not know. I am looking at the combination of a few ideas that naturally come together, but which have not yet been explored together at the academic level — the confluence between nuclear power, climate change and public policy. Within this study, a lot of this is to take the information, which today is scattered randomly in journals and white papers and reports, and pull it all together. Understanding what we do know already will help to determine the course of future research on this subject.

So there are a few different complementary disciplines that come together here. Such is the nature of the real world. There is science, politics and sociology just as a starting point, and the initial report has revealed that there might be other perspectives that have explanatory power or some influence on the final understanding of how these three concepts come together in the discussion about the future of nuclear power.

References

IFM (2015). Porter’s generic competitive strategies. University of Cambridge. Retrieved July 10, 2015 from http://www.ifm.eng.cam.ac.uk/research/dstools/porters-generic-competitive-strategies/

Porter, M. (2008). The five competitive forces that shape strategy. Harvard Business Review. Retrieved July10, 2015 from https://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy

The Economist (2008). Economies of scale and scope. The Economist. Retrieved July 10, 2015 from http://www.economist.com/node/12446567

Subramaniam, N. (1999). The European automotive industry. Tripod. Retrieved July 10, 2015 from http://cometonada.tripod.com/segmentation.htm

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