How do economies (and diseconomies) and minimum efficient scales affect choices in strategic positioning?
There are different economic drivers that influence strategic positioning. Itâ€s important for a firm to assess the various drivers in order to be cost effective, profitable, and differentiated in the market. A firm that can maintain a low-cost strategy has demonstrated the understanding of economies of scale, learning, production, technology, product design, and location advantages for sourcing inputs (Carpenter & Sanders, 2008).
“Economy of scale is a condition under which average total cost for a unit of production is lower at higher levels of output.†(Carpenter & Sanders, 2008, p. 140). Economies of scale offer an advantage for a firm because the condition allows for fixed costs to be spread over great volumes of output (Carpenter & Sanders, 2008). This ultimately leads to greater scale for the firm, generating more inventory management systems and efficiencies around low cost production if done in larger quantities (Carpenter & Sanders, 2008). Ultimately, cost savings occurs when there is an increase in production levels.
“Diseconomy of scale is a condition under which average total costs per unit of production increases at higher levels of input.†(Carpenter & Sanders, 2008, p. 141). Inefficiencies in operations and inefficiencies in certain value chain activities can be a result of diseconomy of scale (Carpenter & Sanders, 2008). These inefficiencies end up costing the company money, creating lost profits due to increased average costs in production. For example, a firm who is trying to stay competitive with low cost production wonâ€t be able to stay competitive against rivals who are able to keep average costs low.
“Minimum efficient scale (MES) is the output level that delivers the lowest total average cost.†(Carpenter & Sanders, 2008, p. 140). A firm wants to maximize operations by keeping costs low, and scaling accordingly. “MES is the smallest scale necessary to achieve maximum economies of scale.†(Carpenter & Sanders, 2008, p. 142). MES is important to strategic positioning because itâ€s the scale at which new entrants must achieve to enter the market (Carpenter & Sanders, 2008).
Each scale scenario impacts the costs of production and profitability for a firm. A firm must assess production capacity and the most efficient levels in order to achieve costs that align with the businesses strategic positioning. Costs can directly impact how a firm competes in an industry, making it important for managers to be aware of efficiencies scales to stay competitive.
What affect do economies of scope have?
Carpenter and Sanders (2008) describe economies of scope when a firm produces two or more products in their operations. By producing multiple products under one operation, the firm can use the same resources to produce the multiple product lines. This becomes an advantage for the firm who can efficiently operate under this type of scale. By sharing one or more products using similar resources, it creates a cost advantage for the firm because itâ€s optimizing resources and capabilities to produce a product that competes in the market. According to Goldhar and Jelinek (1983), economies of scope add to greater control in manufacturing operations, more reliability, more flexibility, and faster response time to market changes. Ultimately, a firm can become efficient in various practices that will add to a competitive advantage, as well as a cost advantage in the market. Economies of scope enable a firm to keep total average costs low, providing a competitive advantage over rivals.
Working in a manufacturing environment, my company produces multiple produce lines within our manufacturing and operations facility. Weâ€ve had to fine tune our processes to create efficient assembly lines, efficient inventory managing strategies, and improve procurement practices when one type of material is used on multiple production lines (cables, bearings, etc.). Economies of scope can be highly beneficial if the company properly prepares its resources and capabilities to meet the multiple product production demands.
How do Learning Curve factors affect your strategy?
The learning curve can have a direct effect on how a business makes production and cost decisions, based on the experience previously gained. Carpenter and Sanders (2008) explain the learning curve as when, “incremental production costs decline at a constant rate as production experience is gained; the steeper the learning curve, the more rapidly costs decline.†(p. 142). As we know, cost decreases are key to a firm staying competitive. Often a firm will negotiate on trying to keep costs as low as possible to gain a competitive advantage in the market. “Managers can make more accurate total-costs forecasts when theyâ€re preparing bids for large projects.†(Carpenter & Sanders, 2008, p. 143). Keeping costs low can help a firm gain more market share (Carpenter & Sanders, 2008).
As my team continues to develop our family vehicle, we have tried to maintain low costs in production to maintain high earnings. As we produce more of the family vehicle, we will become more efficient and gain more knowledge in producing the product and forecasting future material costs. We hope to gain more of the market share in that vehicle class by continuously improving key features that customers find valuable and “hotâ€. In addition, by gaining more market share in the family class, we will see the cost advantages in that product class compared to rivals holding less market share.
What consideration should be given to the Drivers of Differential Advantage?
When a firm is assessing how to differentiate a product(s), considerations in product offerings should be addressed. “As a rule, differentiation involves one or more of the following product offerings: premium brand image, customization, unique styling, speed, more convenient access, and unusually high quality.†(Carpenter & Sanders, 2008, p. 147). Differentiated product offerings allow firm to stand out from competitors, and often define why customers should buy their products over rivals. “To the potential buyer, a product is a complex cluster of value satisfactions.†(Levitt, 1980, para. 14). A firm should differentiate its product and instill values to customers, driving customers to pick their product over competitors.
Different industries require firms to assess different strategies for differentiation. “Economic conditions, business strategies, customers†wishes, competitive conditions, and much more can determine what sensibly defines the product.†(Levitt, 1980, para. 48). Perfect competition markets will require a firm to develop a different strategy for differentiation over a market that reflects oligopoly competition. For example, when there are a number of competitors in a market, it may seem challenging to try and find a key differentiator to market your product to customers. Additionally, in an oligopoly market, with few sellers, it may seem a bit easier for a firm to identify a key differentiator to help their product stand out from the competition. Differentiators drive competitive advantage in a market, and a firm must be able to identify and then exploit this characteristic in order to be successful in the competing market.
Carpenter, M. A. & Sanders, Wm., G. (2008). Strategic management: A dynamic perspective. Upper Saddle River, NJ: Pearson Prentice Hall.
Goldhar, J. D., & Jelinek, M. (1983). Plan for economies of scope. Retrieved from https://hbr.org/1983/11/plan-for-economies-of-scop…
Levitt, T. (1980). Marketing success through differentiation – of anything. Retrieved from https://hbr.org/1980/01/marketing-success-through-…
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