HOW DO ECONOMIES (AND DISECONOMIES) AND MINIMUM EFFICIENT SCALES AFFECT CHOICES IN STRATEGIC POSITIONING?

Carpenter and Sanders (2008) state that economies of scale are drivers of cost advantage. Carpenter and Sanders also state economies of scale is one of the reasons why companies have different production costs. Teece (1980) asserts that companies do not come in a one-size-fits-all shape and that they vary in sizes and the markets in which they operate. Williamson’s work (as cited in Teece, 1980) states that companies and markets “evolve in active juxtaposition with one another” and the object is “to reach a complementary configuration that economizes on (production and) transaction costs” (pp. 223-224). The generic strategy, low-cost advantage, must be able to exploit the economies of scale drivers. Carpenter and Sanders (2008) define economies of scale as the “Condition under which average total cost for a unit of production is lower at higher levels of output” (p. 140). Hill (1988) describes three methods for decreasing production costs, economies of scale, economies of scope, and learning effects (p 403). Hill further states that after the benefits from learning effects are exhausted, the only way to decrease costs further is through economies of scale, which there are two types: plant and firm level.

Carpenter and Sanders (2008) define diseconomy of scale as the “Condition under which average total costs per unit of production increases at higher levels of input” (p. 141). Hill (1988) states that “The concept of minimum efficient scale (MES) defines the minimum plant size necessary to realize plant-level scale economies” (p. 407). Hill also explains that once MES is reached, there is not much more that can be accomplished in scale economies at the plant level. Research by Scherer (1975) and Prais (1976) (as cited in Hill, 1988) states that exploiting the firm-level scale economies includes marketing, buying, distribution, finance, and multiplant operations.

Canbäck, Samouel, and Price (2006) state that diseconomies have to exist because if they did not “there should be no limits to firm growth and size” (p. 32). Canbäck et al. also state that there are two moderating factors of diseconomies of scale:

• Firms can lessen the negative impact of diseconomies of scale by organising activities appropriately and by adopting good governance practices.
• The optimal degree of integration depends on the level of asset specificity, uncertainty and transaction frequency. (p. 33)

Williamson’s work (as cited in Canbäck et al., 2006) states that diseconomies of scale are bureaucratic and can be categorized into four categories:

1. Atmospheric consequences due to specialization,
2. Bureaucratic insularity,
3. Incentive limits of the employment relation, and
4. Communication distortion due to bounded rationality. (p. 33)

This discussion on cost drivers is essential in our StratSim because we have already decided on one of the four generic strategies, and we are now making decisions that can improve sustained competitive advantage. If we over expand our plant capacity, then there will be diseconomies of scale. Further, if we do not expand capacity at all, our firm will incur significant amounts of overcapacity charges, which could also cause diseconomies of scale.

WHAT AFFECT DO ECONOMIES OF SCOPE HAVE?

Carpenter and Sanders (2008) state that economies of scope are another source of cost savings. Carpenter and Sanders define economies of scope as the “Condition under which lower total average costs result from sharing resources to produce more than one product or service. Let me use an example that could apply to the StratSim. If our firm builds a new vehicle, in a class we already manufacture, and either utilize parts or combinations of parts from the original vehicle, we benefit from economies of scope. If the engine we chose is the same, the resources and capacities used to produce the engine for the new vehicle will be less because economies of scope include a less expensive engine because we are producing more at a deceased marginal cost. Morita (2003) states a food store that mergers with another food store provide economies of scale. On the other hand, when a food store and liquor store merge, an economy of scope is realized by cost savings of commonly used resources.

HOW DO LEARNING CURVE FACTORS AFFECT YOUR STRATEGY?

Carpenter and Sanders (2008) state that the learning curve is “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). Within my organization, the costs associated with writing a regulatory course, like sexual harassment, so it correctly customizes for each user is quite high. However, the same team that wrote the sexual harassment course would then write the next regulatory course around similar regulatory issues faster, with the same level of quality. I realize this is not the best example, but in my first e-learning organization I was writing one new course a week, but the more I learned about the writing process, and how the information was obtained, I became much faster at it. At my peak, I was writing three new classes a week. I would not attempt that today because it was about meeting the needs of employers in the early stages of my business, not providing the best courses. Since the e-learning business is quite robust, the courses that I launch in my new business will be higher quality and will take longer to write, but I still expect to realize a benefit from the learning curve as I write more and as I guide others to do the same.

WHAT CONSIDERATION SHOULD BE GIVEN TO THE DRIVERS OF DIFFERENTIAL ADVANTAGE?

Carpenter and Sanders (2008) state that companies should differentiate their products so they can sell those products at premium prices. Carpenter and Sanders also state, “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” (p. 147). Hill (1988) stated that “differentiation may be one way of establishing an overall low-cost position” (p. 402). The concerns over differentiation drivers are the consumers’ willingness to pay for the added differentiation. Market and consumer studies should be performed to determine whether the costs associated with a product or service differentiation will equate to more sales.

REFERENCES

Canbäck, S., Samouel, P., & Price, D. (2006, February). Do economies of scale impact firm size and performance? A theoretical and empirical overview. Journal of Managerial Economics, 4(1), 27-70.

Carpenter, M. A., & Sanders, W. M. (2008). Strategic management: A dynamic perspective—Integrated StratSim simulation experience. Upper Saddle River, NJ: Pearson Prentice Hall.

Hill, C. W. (1988, July). Differentiation versus low cost or differentiation and low cost: A contingency framework. The Academy of Management Review, 13(3), 401-412.

Morita, H. (2003). Analysis of economies of scope by data envelopment analysis: Comparison of efficient frontiers. International Transactions in Operational Research, 10(4), 393-402.

Teece, D. J. (1980). Economics of scope and the scope of the enterprise. Journal of Economic Behavior and Organization, 1(3), 223-247.