In a noninflationary environment, people can acquire various liquid assets, earn a reasonable return on them, and count on them as the means to acquire a basket of consumer goods in the event of especially large needs or declines in income. Reprinted with the permission of the publisher. The Brookings Institution, 1981), p. 173. Copyright © 2020 Harvard Business School Publishing. Only if the Government is committed to limit the rise to a creep of not much above 2 per cent can there be reasonable predictability. A company's cost competitiveness is largely a function of how efficiently it manages its internally performed value chain activities and the costs in the value chains of its suppliers and forward channel allies. To begin with, companies usually experience a different rate and pattern of cost change for each cost component. Robert W. Crandall, The U.S. Steel Industry in Recurrent Crisis (Washington, D.C. That’s in an industry that started from a base of $20 billion in sales and $3 billion in net income. A company that finds itself in a trap like XYZ’s can do something to get out of it. The shifts in the several cost components are dramatic. and costs are competitive are .f. The following graph shows the cost curves for a firm in a perfectly competitive market. In countering these strategies, the Sun Company decided not to upgrade its Pennsylvania refinery and gambled that the industry’s shift to low-quality crude would leave Sun ample access to high-quality crude and that the price difference between high-quality crude and low-quality crude would not average the $6 to $7 per barrel that the other companies had used to justify their investments. The size of any first-mover advantage depends on the speed of increases in capital requirements, the extent of the industry’s need to add capacity to meet new market demand, and the potential for lower-cost substitutes to capture a lucrative share of the market. It's impossible to determine whether lowering costs or increasing revenue is more important across the board for all companies. To use it, a company must recast its own historical cost accounting data into the principal cost categories that eventually make up the value of its product. Exorbitant Drug Costs Intellectual property is a set of intangibles owned and legally protected by a company from outside use or implementation without consent. Access to natural resources that are restricted to competitors 2. The goal is to be the very best in your field. To sustain the advantage, it must be able to recoup the cost suffered from temporary excess capacity when rivals finally add or replace plant and equipment at inflated costs. The easier it is to replicate, the faster competition catches up. Petroleum refining provides an interesting example of how to defend against long-term price increases in a key resource input. The levelized cost of energy (LCOE) is a measure of a power source that allows comparison of different methods of electricity generation on a consistent basis. Nearly every electric utility that is constructing nuclear power stations to meet future generating needs is being squeezed by escalating capital costs and a market place replete with generating capacity. This involves constructing a value chain, a diagram that shows the value added at each step in the whole market process and exposes shifting cost components. 7. At IBM, top management decided that the economic impact of rising operating costs would outweigh that of escalating capital costs. Less vulnerable are companies that (1) differentiate in parts of the value chain less affected by costs, (2) cater to price-insensitive buyers, or (3) enhance the value of their differentiation features enough to outrun the effects of higher unit costs. According to Hauht, the price analysis strategy is effective when applied to products that can be contrasted to other, “similar” procurements. Making these kinds of investments “early” can mean major savings in capital costs; Standard Oil of California, which spent $1.3 billion to upgrade its Pascagoula, Mississippi refinery in 1981 and 1982, has estimated that the same improvement would have cost $2 billion in 1983. Market orientation is a business approach that prioritizes identifying the needs and desires of consumers and creating products that satisfy them. In such cases, cite the price of prior purchase and note if it was competitive or based on catalog price or other. With the rise in the number of fast retail operations, other fast food chains, service stations, and retail companies began to compete for the same locations and thus drove up their prices. Then deflation began, market demand slackened, and a deep recession set in. For the sake of simplicity, let’s consider three basic strategic postures relating to growth: building market share, defending the current market share, or giving up market share (taking a “shrink abandon” approach). A relative cost shift can occur in any one of three main areas—suppliers, the company’s own segment, or forward channels. To be sure, they can never get a guarantee of future tuition costs, or the prospective price tag on their retirement home, or charges for large medical needs. Companies in the middle (either more or less affected by two variables) have less clear-cut strategies. Although it makes sense to start with a value chain for a whole business, searching for variations by segment can reveal important differences in each product’s cost competitiveness and the company’s unwitting cross-subsidy of unprofitable products. Season. In 1981, however, the price of crude shot up 44.4%, while the rise in gas prices was only 23.5%. To illustrate the strategic payoff of constructing a value chain, look again at Exhibit I. If that is impossible and you must continue to base the strategy on the better performance of your product, then you must make certain that the costs to buy the new plant and equipment necessary to make your product the better performer can be offset by performance gains that will preserve your buyers’ preference for your product and forestall their natural motivation to switch to a lower-cost substitute. Highly skilled labor 3. Cost of acquisition is the total of expenses incurred when a business acquires a new client or a new asset. Price patterns across fuel types have varied widely from fuel source to fuel source and from year to year. Though small at first, the cost disparities that emerge can over time create big shifts in cost competitiveness and competitive advantage. Obviously, companies that expect high future operating and low capital cost increases and companies that anticipate low inflation in both types of costs have a greater degree of strategic freedom. No company can totally avoid the impact of increasing costs. A target cost is the maximum amount of cost that can … The value chain is revealing but not simple. If the inflationary combination results in a company expecting higher relative capital costs but lower operating costs and if its industry has good growth prospects and a mature technology, then there is a potential first-mover advantage from adding new capacity early. If all competitors feel the same inflationary impact on operating costs but the fixed asset-capacity cost increases that they suffer from differ greatly, then an “invest and grow” strategy to build market share can work to the advantage of a company, provided it invests early in new capacity. Competitive advantages can be found almost anywhere. The future holds even more competitive pricing threats; a potential breakthrough in the development of solar thermal equipment and photovoltaic cells by General Electric, Westinghouse, United Technologies, and several Japanese companies portends important new sources of even lower-cost energy substitutes.
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