Economics of Strategy Besanko Dranove Shanley and Schaefer

Economics of Strategy Besanko, Dranove, Shanley and Schaefer, 4 th Edition Chapter 2 Horizontal Boundaries of the Firm Slides by Richard Ponarul California State University, Chico John Wiley Sons, Inc.

Horizontal Boundaries l l l Horizontal boundaries: How big a market does a firm serve? 즉, 기업의 경계는 기업이 생산하 는 제품의 수와 양에 의해 결정 In some industries a few large firms dominate the market (Ex. Intel과 같은 칩제조회사 또는 Air Bus와 같은 상업용 비행기 제조회사) In others, smaller firms are the norm (Gucci와 같은 Apparel design, Universities, 경영컨설팅 기업)

Horizontal Boundaries There are several industries where large firms and small firms co-exist (Software, Beer, Banks, Insurance companies) l What determines the horizontal boundaries of firms? ⇒ Economies of Scale, Scope and Learning Curve l 규모의 경제와 범위의 경제는 기업의 경계 및 시장구조 (market structure)를 결정할 뿐 아니라 M&A, 다각화, 가 격결정, 진입과 퇴출과 같은 기업 전략에 영향을 주는 중 요한 요인임 l 규모 및 범위의 경제를 결정하는 요인들이 무엇? l

Determinants of Horizontal Boundaries l Economies of scale – l Economies of scope – l Declining average cost with volume Cost savings when different goods/services are produced “under one roof” Learning curve – Cost advantage from accumulated expertise and knowledge

Economies of Scale l When the marginal cost is less than average cost, there are economies of scale. Or, when the MC>AC, there are diseconomies of scale. MES (minimum efficient scale): 평균비용을 최소화 하는 생산량 l Example: Computer software. The marginal cost of reproducing a CD is negligible compared with the huge fixed cost associated with software development

U-shaped cost curve

U-Shaped Cost Curve l l Average cost declines as fixed costs are spread over larger volumes Average cost eventually starts increasing as capacity constraints kick in U-shape implies cost disadvantage for very small and very large firms Unique optimum size for a firm

L-shaped Cost Curve l l In reality, cost curves are closer to L-shaped curves that to U-shaped curves A minimum efficient size (MES) beyond which average costs are identical across firms

L-shaped Cost Curve

Economies of Scope l l l Firm 1 produces two products: A and B Firm 2 produces A only If the cost of producing A is smaller for Firm 1 than Firm 2, there are economies of scope

Economies of Scope l l l TC(QA, QB) < TC(QA, 0) + TC(0, QB) TC(QA, QB) – TC(0, QB) < TC(QA, 0) – TC(0, 0) Production of B reduces the incremental cost of producing A

Economies of Scope l Common expressions that describe strategies that exploit the economies of scope – – “Leveraging core competences”: 핵심경쟁력을 지렛 대화 Diversification into related products: 관련다각화

Some Sources of Economies of Scale/Scope l l Spreading of indivisible fixed costs (제품특성에 따른 indivisibility와 플랜트 특성에 따른 indivisibility) Increased productivity of variable inputs (인적자원의 전 문화로 인한 생산성 증가: 전문화를 위한 초기투자가 높 을 경우) Saving on inventories: 재고비용에 따른 규모의 경제효 과 The cube-square rule: 수입은 부피에 비례하고 비용은 면적에 비례

Tradeoffs Among Technologies

Tradeoffs Among Technologies l l If output needs to be increased beyond a point, capital intensive technology needs to be substituted for labor intensive technology The “lower envelope” of the two cost curves is the long run average cost curve

Long Run and Short Run l l l Cost reduction through better capacity utilization: short run economies of scale Cost reduction by switching to high fixed cost technology: long run economies of scale Economies of scale more likely when production is capital intensive

Economies of Scale and Boundaries l l Larger markets lead to specialized firms As markets get even larger, the specialized activity may become “in house” due to economies of scale: 시장이 그리 크지 않을 경 우 독립적인 전문화 기업. 그러나 시장규모가 더 욱 확대되면 전문화 된 생산과정을 기업 내에서 수행해도 충분한 규모의 경제효과를 가질 수 있 음

Inventories Bigger firms can afford to keep smaller inventories (relative to sales volume) compared with smaller firms - Two firms may not experience stock outs at the same time - Merging the two firms will reduce the probability of stock out, given the level of inventory - The combined firm can maintain a lower level of inventory and have the same probability of stock out as before l

Aircraft, Rolling Stock as Inventories l l The inventory model applies to aircraft, rolling stock (기관차나 객차 또는 화물트럭을 의미) and road vehicles A larger bus company can keep a smaller number of “spare buses” (relative to size of operations) and still provide reliable service, whereas smaller companies need (proportionately) larger number of spares

Cube-Square Rule l l l Double the diameter of a hollow sphere and the volume will increase eightfold, whereas the surface area will increase only fourfold The cost of the sphere is likely to increase by less than eight times If the hollow sphere is part of production equipment in a chemical plant, cost savings follow from increased size

Cube-Square Rule l Examples of Scale Economies due to the Cube -Square Rule – – – Oil pipelines Warehousing Brewing tanks

Other Sources of Economies of Scale/Scope l l l Purchasing Advertising Research and development

Economies of Scale in Purchasing l Large buyers can get volume discounts – – Reduced transaction costs: 1000개를 한꺼번에 거 래할 경우 1개씩 1000번에 걸쳐 거래할 경우에 비 해 1개당 거래비용이 감소. 가격할인이 가능 More aggressive bargaining by large buyers: 구매 자는 소량 구입 때보다 대규모 구입시 가격에 더욱 민감

Economies of Scale in Purchasing l l Example: Group insurance is typically cheaper than individual insurance. Big buyers like Cal. Pers (California Public Employee Retirement Systems) drive hard bargains with the insurers

Rationale for Volume Discounts l l l Cost of service (per unit) is lower for large buyers Large buyers may be more price sensitive Large buyers can disrupt operations of the seller by refusing to buy

Economies of Scale in Purchasing l Alternatives to bigness Small firms can join purchasing alliances Ex. ACE Hardware store는 개인소유 철물점이나 제품구매는 공 동구매를 통해 가격을 낮추는 효과 – Price sensitive firms may get better bargains even when they are small Ex. 제약회사들은 가격에 민감한 소규모 개인 약국에는 할인을 해 주지만 대규모 체인 약국에 대해서는 할인판매를 하지 않는 경 우가 있음 –

Economies of Scale and Scope in Advertising l Advertising cost per customer = (Cost per potential customer) x (Proportion of potential customers who become actual customers) - Large firm have lower cost of reaching a potential customer (First Term): Ex. 전국 규모의 맥주회사와 지역맥주회사: 방송광고제작 에는 거의 비슷한 비용이 소요되나 전국에 광고할 경우 와 지역방송에 광고할 경우 고객가능 1인당 광고비는 전 국대상 광고일 경우 훨씬 낮은 비용

Umbrella Branding and Economies of Scope A well known brand like Samsung covers different products l There are economies of scope in developing and maintaining these brands Ex. 삼성의 평면 디지털 TV 광고를 본 소비자는 삼성의 다 른 제품에 대해서도 신뢰 ⇒ Umbrella Branding Ex. 브랜드의 우산효과는 새로운 제품 출시를 위한 광고 에도 비용을 낮추는 효과 l

Economies of Scale in R & D l Minimum feasible size for R & D projects and R & D departments Ex. 제약회사는 신약 개발에 R&D에는 평균 5억 달러 소요 l Economies of scope in R & D; ideas from one project can help another project Ex. 신약 R&D의 경우 19개의 개발 프로젝트를 수행하는 제약회사가 17개의 개발프로젝트를 수행하는 제약회사에 비해 약 4. 5% 생산성 이 높은 것으로 나타남

Innovation and Size l l l Are big firms better at innovating compared to small firms? 항상 그런 것은 아닐 수 있음 Size reduces the average cost of innovations Smallness may be more suitable for motivated researchers 대규모 기업보다 규모가 작은 기업 의 연구자들이 더 강한 모티베이션을 가질 수 있 음

Diseconomies of Scale l l Beyond a certain size, bigger may not always be better The sources of such diseconomies are – – Increasing labor costs Bureaucracy effects Scarcity of specialized resources “Conflicting out”

Firm Size and Labor Cost l l Data indicate that workers in large firms get paid more than workers in small firms Possible reasons – – – Unionization is more likely in large firms Work may be more enjoyable in small firms: 대기업 보다 가족적 분위기, 업무의 유연성 등으로 열심히 일하려는 동기가 클 수 있음 Large firms may have to attract workers from far away places 이에 따라 교통비나 이사와 관련된 비용 을 보상해야 할 필요성

Firm Size and Labor Cost 대기업이 상대적으로 유리한 점 - Large firms experience lower worker turnover compared to small firms - Savings in recruitment and training costs due to lower turnover may partially offset the higher labor cost l

Bureaucracy Effects and Firm Size l When a firm gets large: 규모가 큰 기업일 수록 관료화로 인한 비용 증가 – – – it is difficult to monitor and communicate with workers it is difficult to evaluate and reward individual performance 이러한 이유로 세밀한 업무규정이 필요하고 여러 단 계의 결제가 필요. 이러한 업무규정 및 결제단계는 창의성을 억제할 가능성

Specialized Resources As the firm expands, certain resources may be limited in availability Ex. As a restaurant expands, the chef may find himself/herself spread too thin Ex. Jack Weltch of GE l Other limited resources may be l – – – desirable locations specialized workers talented managers

“Conflicting Out” l 기업 규모가 커짐에 따라 고객들 간 이해상충이 야기될 수 있는 가능성이 증가할 경우 - Professional services firms may find it difficult to sign up a client if a competitor is already a client of the firm - When sensitive information has to be shared, such conflicts may impose a limit to the growth of the firm Ex. 컨설팅 기업, 법률회사 등

The Learning Curve l l l Learning economies are distinct from economies of scale 학습효과는 누적생산이 증가함에 따라 노하우 의 축적, 기술의 혁신 등에 의해 만들어짐 Learning leads to lower costs, higher quality and more effective pricing and marketing

The Learning Curve AC AC 1 AC 2 Q 2 Q Quantity

Slope of the Learning Curve l l l Slope of the learning curve is the relative size of the average cost when cumulative output doubles A slope of 0. 2 indicates that the average cost will decline by 20% when the cumulative output doubles Learning flattens out over time and the slope eventually becomes 0. 0

Learning Curve Strategy l l Expand output rapidly to benefit from the learning curve and achieve a cost advantage May lead to losses in the short term but ensure long term profitability: 학습효과를 극대화 하기 위해서는 초기에 대규모로 제품을 생산할 수 있 도록 하기 위한 대규모 투자가 필요할 뿐 아니라 정보를 공유하고 학습을 장려하기 위한 제도적 뒷 바침이 필요함

BCG’s Growth/Share Paradigm l l l 보스톤 컨설팅은 학습효과 개념을 이용하여 성 장-시장점유 매트릭스를 개발 Product life cycle model combined with an internal capital market, with the firm serving as a banker Use the cash generated by “cash cows” to exploit the learning economies of “rising stars” and “problem children”

BCG’s Growth/Share Matrix

Individual Learning and Organizational Learning resides with individuals l Organizational learning(조직학습) includes expertise that individuals have and the way they complement each other - Ex. 작업장에서 팀으로 일할 경우 팀원간의 보완적 업무 및 기술. 조직학습은 팀원간의 관계에 축적 l 조직학습이 중요할 경우 직장 이동(job mobility)이 높으 면 조직학습을 저해할 가능성 l 개인학습이 중요할 경우에는 직장이동이 높을 수록 학 습효과를 높이는 효과 l

Learning Curve and Scale Economies Learning reduces unit cost through experience l Capital intensive technologies can offer scale economies even if there is no learning Ex. 알루미늄 캔 공장은 고정투자는 많이 소요되어 규모 의 효과는 존재하지만 학습효과는 거의 없음. 이런 경우 직장이동이 높아도 큰 문제가 없음 l Complex labor intensive processes may offer learning economies without scale economies l