Nalyse the steps towards cost leadership within the production relationship of a modern firm. Be specific and offer some examples.
Managerial Economics Assignment Question
Question: Analyse the steps towards cost leadership within the production relationship of a modern firm. Be specific and offer some examples. [Hint: Look at the 5 Steps outlined below]. [100 marks]
MAPPING THE PRODUCTION PHASE CHECKLIST
STEP 1: Distinguish between Economies of Scale, Economies of Size and Economies of
Scope within the production process.
Scale: ýK ýL 2% and ýq > 2%
Size: achievable in competitive market ýq 4% in phase 1, decide ex-post in phase 2 of the production process the most optimal, ýK or ýL, and implement in phase 3.
Scope: across production so that c(q1,q2) < c(q1) + c(q2) STEP 2: Focus on increasing average productivity of labour APL. How? Note that APL w/AVC, where w wage proxy and AVC average variable costs. STEP 3: Normalise the wage structure: let w 1. In other words, offer the workers incentives or bonus payments as productivity increases, revisit the organisational structure and consider the production process as a nexus of contracts. STEP 4: Demarcate between excess capacity (idle capacity) and reserve capacity (installed capacity), aware that excess capacity can occur if the product is not sufficiently differentiated fast enough in the market to capture market sales. At the point of production in phase 1 ensure sufficient installed capacity to meet demand in later phases of production. STEP 5: Control more of the production costs to allow more costs to come under control during the production process. Hedge positions on material inputs, minimise exchange rate risks, workers on fix-wage fix-term contracts with incentives per flexible manufacturing. Purpose of the Assignment: To understand the link between production and costs, and in particular to identify the 5 Steps in obtaining cost leadership in an industry from the perspective of managing production plants in terms of minimising costs and maximising capacity. We want you to understand the economics behind sustaining cost leadership advantage in an industry