Elements of the Capacity Expansion Decision

The mechanics of making a capacity expansion decision in the traditional capital budgeting sense are quite straightforward—any finance textbook will supply the details. Future cash flows resulting from the new capacity are forecasted and discounted to weigh them against the cash outflows required for the investment. The resulting net present value ranks the capacity

Causes of Overbuilding Capacity Preemptive Strategies

Causes of Overbuilding Capacity There seems to be a strong tendency toward overbuilding of ca-pacity, particularly in commodity businesses, that goes far beyond that due to mistaken attempts at preemption. Since overbuilding is a key problem in capacity expansion, we must explore its causes in some detail. The risk of overbuilding is most severe

Entry through Internal Development Entry through Acquisition

1. Entry through Internal Development Entry through internal development involves the creation of a new business entity in an industry, including new production capa-city, distribution relationships, sales force, and so on. Joint ventures raise essentially the same economic issues because they are also new-ly started entities, although they create complicated questions about the division

Sequenced Entry into new businesses

Any decision to enter an industry must include a target strategic group. However, the discussion in Chapter 7 combined with the analysis earlier in this chapter suggests that a firm can adopt a se-quential strategy of entry involving initial entry into one group and subsequent mobility from group to group. For example, Procter and

Portfolio techniques in competitor analysis

Since the late 1960s a number of techniques have been developed for displaying a diversified firm‘s operations as a “portfolio” of busi-nesses. These techniques provide simple frameworks for charting or categorizing the different businesses in a firm‘s portfolio and deter-mining the implications for resource allocation. Techniques for portfolio analysis have their greatest applicability in

How to conduct an industry analysis

How should one go about analyzing an industry and competi–tors? What types of data does one look for and how can they be or-ganized? Where does one look for these data? This appendix deals with these questions and some of the other practical problems in-volved in conducting an industry analysis. There are basically two

The Value Chain and Competitive Advantage of the firm

Every firm is a collection of activities that are performed to design, produce, market, deliver, and support its product. All these activities can be represented using a value chain, shown in Figure 2-2. A firm’s value chain and the way it performs individual activities are a reflection of its history, its strategy, its approach

Linkages within The Value Chain of the firm

1. Linkages within the Value Chain Although value activities are the building blocks of competitive advantage, the value chain is not a collection of independent activities but a system of interdependent activities. Value activities are related by linkages within the value chain. Linkages are relationships between the way one value activity is performed and

Competitive scope and the value chain of the firm

Competitive scope can have a powerful effect on competitive advantage, because it shapes the configuration and economics of the value chain. There are four dimensions of scope that affect the value chain: Segment Scope. The product varieties produced and buyers served. Vertical Scope. The extent to which activities are performed in-house instead of by

The value chain and organizational structure

The value chain is a basic tool for diagnosing competitive advantage and finding ways to create and sustain it, the subject that will dominate the chapters that follow. However, the value chain can also play a valuable role in designing organizational structure. Organizational structure groups certain activities together under organizational units such as marketing

The value chain and cost analysis

The behavior of a firm’s costs and its relative cost position stem from the value activities the firm performs in competing in an industry. A meaningful cost analysis, therefore, examines costs within these activities and not the costs of the firm as a whole. Each value activity has its own cost structure and the

Cost Drivers of the firm

Ten major cost drivers determine the cost behavior of value activities: economies of scale, learning, the pattern of capacity utilization, linkages, interrelationships, integration, timing, discretionary policies, location, and institutional factors. Cost drivers are the structural causes of the cost of an activity and can be more or less under a firm’s control. Drivers often

The Cost of Purchased Inputs in firm

Procurement has strategic significance in almost every industry, but rarely has sufficient stature in firms. Every value activity employs purchased inputs of some kind, ranging from raw materials used in component fabrication to professional services, office space, and capital goods. Purchased inputs divide into purchased operating inputs and purchased assets. The total cost of

Segment Cost Behavior of the firm

Thus far I have described how to analyze the cost behavior of a business unit as a whole. In practice, however, a business unit usually produces a number of different product varieties and sells them to a number of different buyers. It may also employ a number of different distribution channels. For example, a

Cost Dynamics in firm

In addition to analyzing cost behavior at a point in time, a firm must consider how the absolute and relative cost of value activities will change over time independent of its strategy. I term this cost dynamics. An analysis of cost dynamics enables a firm to forecast how the cost drivers of value activities

Determining the Relative Cost of Competitors

The value chain is the basic tool for determining competitor costs. The first step in determining competitor costs is to identify competitor value chains and how activities are performed by them. The process is the same as that employed by a firm to analyze its own value chain. In practice it is often extremely

Gaining Cost Advantage

There are two major ways that a firm can gain a cost advantage: Control cost drivers. A firm can gain an advantage with respect to the cost drivers of value activities representing a significant proportion of total costs. Reconfigure the value chain. A firm can adopt a different and more efficient way to design,

Sustainability of Cost Advantage

Cost advantage will result in above-average performance only if the firm can sustain it. Improving relative cost position in unsustainable ways may allow a firm to maintain cost parity or proximity, but a firm attempting to achieve cost leadership strategy must also develop sustainable sources of cost advantage. Cost advantage is sustainable if there

Implementation and Cost Advantage

This chapter has focused on how to achieve a cost advantage through changes in strategy and the way activities are performed. However, the success of cost leadership hinges on a firm’s skills in actually implementing it on a day to day basis. Costs do not go down automatically or by accident but rather as

Pitfalls in Cost Leadership Strategies

Many firms do not fully understand the behavior of their costs from a strategic perspective and fail to exploit opportunities to improve their relative cost position. Some of the most common errors made by firms in assessing and acting upon cost position include: Exclusive Focus on the Cost of Manufacturing Activities. When one mentions