BIS 513 Business Strategies

Volume and Cost Strategies

 Volume strategies

 Large sales volume

 Large customer number
 Large Scale

 Manufacturing orgns., banks, retailers :

They have to work in large volumes
Volume strategies
Reasons:

⃰⃰ Spread the burden on a wide range of income

Burden: High fixed costs
Interest payements
.........
⃰ To decrease per unit production cost
Volume strategies

⃰To invest in information systems

⃰To gain bargaining power

Volume strategies

⃰ To finance R&D, innovative work, new product development...

regular cash flow is needed

⃰ To reach a high level capacity of capital and human investments so

that
small scale organizations can not compete
Volume strategies

⃰ To stay strong for major customers for

sustaining credibility

⃰ To be able to compete internationally

Critical Mass

 An organization has to operate over a minimum volume

in order to continue to exist in a specific market.

 This scale of activity is called «CRITICAL MASS»

 If Critical Mass cannot be achieved

«mission» and «scale» should be redefined
Experience Curve

 Experience effect creates the learning curve

 Unit cost of any product produced is compared to the total

production amount

 Experiences gained due to increasing production and sales brings

some decreases in costs
Experience curve

 Ex: When total production doubles,

the decrease in unit cost is 16 %.
When you produce 22500 units,
unit cost is $54.
Draw the experience curve.
Experience curve
Experience curve pricing

 If you know the curve, at the start you can give a low sales price with
only a small margin.

 Later on as production increases per unit cost will decrease and profit
margin will increase.

 Ex: Start with $60 which has only $6 margin.

When you double the production, margin will be $15.
Experience curve pricing

 Experience curve pricing works well

if
 market share is high and demand has price sensitivity.

 Also product differentiation is low in these markets.

Experience curve

 Question:
The organization can not decrease costs
and
market share is not increasing.

What is the best strategy?

Experience curve

 Barrier to new competitors

 Increasing market share is the strategic priority

 Lowest cost and largest amount of production brings market

leadership

 In certain cases the experience effect can vanish

Porter’s Cost Leadership Strategy

 Cost effective activities in all functional areas:

* Marketing
* Production
* Quality management
* Information systems management
* Distribution
Porter’s Cost Leadership Strategy

 High market share

 Near to raw material sources
 Ease of production is a priority for design
 Spread costs to product mix
 Working with major customer accounts
Porter’s Cost Leadership Strategy

 Big investments
 Aggressive pricing
 Losses at early phases
 Profits increase once a good market share is attained
 New investments will allow to continue cost leadership
PIMS Analysis

 Profit Impact of Marketing Strategies

 A simulation
 Aim: To help organizations by providing information about their
expected profits and other strategic choices in various competitive
conditions, in various operational areas and industries.
 PIMS makes it possible to see the impacts of a strategic action.
 Almost 4000 organizations around the world are still providing data.
Some general principles from PIMS
Analysis
 There 37 factors influencing an organization’s profitability:

 Market share
 Total marketing expenses
 Quality of products/services
 R&D expenses
 Vertical integration
 Intensity of capital
Some general principles from PIMS
Analysis
 Market share has high impact on profitability

 profitability (High Mktshr %30 ↑ ) = 3 * profitability (low mktshr %7 ↓ )

 Reasons: Economies of scale, relatively low ratio of total marketing

expenses compared to sales, high capital turnover, bargaining
power, ...
Some General Principles from PIMS
Analysis

 Quality of products/services affects profitability:

 profitabilty (high quality and low mktshr)= 4 * profitability (low quality and low mktshr)

 Reason: .....
Some General Principles from PIMS
Analysis
 Relationship between R&D expenses and profitability:

 If R&D expenses / sales ratio is high

 Profitability ( no R&D, low mktshr) = 2 * profitability (R&D, low mktshr)

 Question: What is a more profitable strategy if market share is low and

R&D expenses / sales ratio is high ?

 If mktshr is high, even R&D expenses / sales ratio is high profitability ↑ 18%.
Some General Principles from PIMS
Analysis
 If market share is high

 Vertical integration is an important strategy

for higher profitability
Some General Principles from PIMS
Analysis
 If
 Total Assets / Sales ratio is high
 then
 Profitability is low

 Reason: ...