Strategy, Cost and Industrial Engineering
Strategic Management and Competitive Advantage
J.B. Barney and W.S. Hesterly
Decisions that assure that a firm has products or services that have a profitable demand for a long period of time
A firm has competitive advantage when it is able to create more economic value than rival firm or firms.
Economic value is the difference between the perceived benefits gained by a customer and the full economic cost the product or service.
Gaining or Increasing Competitive Advantage
Increasing the perceived benefits gained by a customer (Differentiating the product or service by providing more benefit – Product/service improvement based strategy)
Decreasing the full economic cost the product or service (Cost based strategy).
Business Level Strategies
Two Generic Business Level Strategies
generate economic value by having lower costs
generate economic value by offering a product
that customers prefer over competitors’ product
Industrial Engineering and Cost of Products
Industrial engineering optimizes (minimizes) cost of resources to produce the products and services at the designed level of quality.
Industrial engineering uses rationalization to identify wastes and eliminates them from products and processes.
IE and Continuous Improvement
IE encourages all the employees to contribute ideas to reduces costs in various microlevel elements and tasks that help in continuous reduction of cost elements.
IE and Cost Reduction/Process Improvement Projects
IE department periodically undertakes process improvement projects to incorporate the latest efficiency improving technologies into the processes and contributes to cost reduction.
Periodic Mathematical Optimization of Costs
Thus there are opportunities to do mathematical, statistical and OR based optimization periodically.
Cost Leadership Business Strategy
A firm that chooses a cost leadership business strategy focuses on gaining advantages by reducing its cost to below those of all its competitors
Popular companies following cost leadership strategies
Ryanair – Air travel
Timex and Casio – watches
BIC – disposable pen and razors
Walmart - Retail
What factors or actions create cost advantage
Economies of scale
Diseconomies of scale create cost advantage sometimes – Mass versus Lean production
Experience difference – Learning curve economies
Acquisition of low cost productive inputs
Technology advantages independent of scale
Economies of Scale
average cost per unit falls as quantity increases
-until the minimum efficient scale is reached
are a cost advantage because competitors may
not be able to match the scale because of capital
requirements (barrier to entry)
international expansion may allow a firm to have
enough sales to justify investing in additional
capacity to capture economies of scale
Diseconomies of Scale
are an advantage for those who do not have
diseconomies of scale
occur when firms become too large and bureaucratic
are a risk of international expansion
Learning Curve Economies
a firm gets more efficient at a process with experience
the more complicated/technical the process,
the greater the experience advantage
international expansion may propel a firm down the
experience curve because of higher volumes
Differential Low-Cost Access to Productive Inputs
may result from:
history—being in the right place at the right time
being first into a market—esp. foreign markets
locking up a source—buying all of its output
Technology Independent of Scale
may allow small firms to become cost competitive
advantage typically accrues to the ‘owner’ of the
technology—may or may not be the ones who actually
use the technology
size of the advantage depends both on how valuable
and protectable the technology is
Industrial engineering department plays a key role in this.
firms get to choose how they will serve the market
we’ll offer level of quality that is inexpensive to
firms can make policy choices that give people
incentives to reduce cost at every opportunity
Organization: Having staff consultants who decrease
costs on a continuous basis using IE methods.
Cost Leadership & Competitive Advantage
A source of cost advantage will lead to if it is competitive advantage if that source is:
Costly to Imitate
Organized (Implemented Appropriately)