Name: Yasmine safsouf

ID: 201702232
Instructor: Dr. Abdul Rahman Baydoun
Subject: SM Assignment
 Answers:
1. Wal-Mart, Timex, Casio, and Hyundai are all cited as examples of firms pursuing cost
leadership strategies, but these firms make substantial investments in advertising, which
seems more likely to be associated with a product differentiation strategy. Are these
firms really pursuing a cost leadership strategy or are they pursuing a product
differentiation strategy by emphasizing their lower costs?
Answer:
Yes. There is an element of both business level strategies in the actions of these
companies. However, there would be little point in their advertising if they did not
vigorously pursue cost leadership strategies. These firms need to generate large sales
volumes to fully exploit their low per unit cost structure. Keep in mind that their
advertising is not just for their intended customers. Their advertising is an important
signal to competitors as well. As such, it is an important part of their cost leadership
strategies.
These companies successfully pursue cost leadership. A cost-leadership strategy must
constantly strive to reduce its costs (relative to the costs of competitors) and create value for
customers. Cost-reduction strategies include:
1. Building efficient-scale facilities
2. Establishing tight control of production and overhead costs
3. Minimizing the costs of sales, product research and development, and service
4. Investing in state-of-the-art manufacturing technologies
Implementing and maintaining a cost leadership strategy help these a company in considering
its value chain of primary and secondary activities and effectively link those activities, if it is to
be successful. The critical focus in the successful implementation of a cost leadership strategy is
on efficiency and cost reduction, regardless of the value creation activity.
2. When economies of scale exist, firms with large volumes of production will have lower
costs than firms with smaller volumes of production. The realization of these economies
of scale, however, is far from automatic. What actions can firms take to ensure that
they realize whatever economies of scale are created by their volume of production?
Answer:
First, such firms must sell their productive output. Without sales revenue, economies of scale
are of little benefit. Second, such firms must carefully manage the distribution of their output.
Economies of scale could be outweighed by high storage and distribution costs if firms incur
significant carrying costs for finished product inventories. Third, such firms must be careful not
to extend lenient credit terms that have the effect of making the firm a lending institution.
Customers must be given incentives to pay on time and/or be charged an interest rate high
enough to ensure that the firm’s economies of scale are not cancelled out by the cost of
carrying accounts receivable.
Economies of scale are reductions in average costs attributable to production volume increases.
They typically are defined in relation to firms, which may seek to achieve economies of scale by
becoming large or even dominant producers of a particular type of product or service. A
distinction can be made between internal and external economies of scales. Internal economies
of scale occur when a firm reduces costs by increasing production. External economies of scale
occur when an entire industry benefits from expansion; for example, through the creation of an
improved transportation system, a skilled labor force, or by sharing technology.
When a firm grows beyond the scale of production that minimizes long-run average cost,
diseconomies of scale may result. When diseconomies of scale occur the firm sees an increase
in marginal cost when output is increased. This can happen if processes become "out of
balance," or when one process cannot produce the same output quantity as a related process.