Strategy, Cost and Industrial Engineering
Books referred
Strategic Management and Competitive Advantage
J.B. Barney and W.S. Hesterly
Strategy
Decisions that assure that a firm has products or services that have a profitable demand for a long period of time
Competitive Advantage
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
Cost Leadership: generate economic value by having lower costs than competitors
Example: Wal-Mart
Product Differentiation: generate economic value by offering a product that customers prefer over competitors’ product
Example: Harley-Davidson
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.
Industrial engineering identifies engineering changes in products and processes in the system that give productivity improvement and cost reduction.
Industrial engineering identifies engineering changes in products and processes in the system that give productivity improvement and 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
Management policies
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.
Policy Choices
firms get to choose how they will serve the market
we’ll offer level of quality that is inexpensive to produce
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 competitive advantage if that source is:
Valuable
Rare
Costly to Imitate
Organized (Implemented Appropriately)
Updated 2018 - May 2018
First published 22 September 2013
Updated 2018 - May 2018
First published 22 September 2013
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