Test Your Knowledge: Sources of Cost Advantage
What is the source of cost advantage in each example? Consider the differences in rates and approaches to managing cost functions. If there are no obvious differences then the source of cost advantage is Productivity.
Question 1: LandStar System, Inc. uses an extensive network of independent agents and owner-operators, a strategy that minimizes capital costs. As a result, the company has returns 15%-20% higher than the truckload group average. (
Year 1997-SIC 4213)
What is the source of cost advantage: Rate, Approach to Managing Cost Functions or Productivity?
Answer>>
Question 2: In the early 80s, Phillips failed in its attempt to compete with VCRs of its own design. Instead, Phillips sold machines purchased from Matsushita. To lower manufacturing costs on its other products, Phillips moved more production of color TVs from North America to other countries abroad. Phillips tried to capture Economies of Scale in VCRs by building them under license from JVC. (
Year 1987-SIC 3651)
What is the source of cost advantage: Rate, Approach to Managing Cost Functions or Productivity?
Answer>>
Question 3: In 2000, by switching to mail order and internet sales, direct selling computer companies had lower overhead costs than computer firms using conventional dealers with branch offices and expensive sales forces. With low selling and administrative expenses, mail order companies were experiencing rising earnings, while companies using dealers were losing money. (
Year 2000-SIC 3571)
What is the source of cost advantage: Rate, Approach to Managing Cost Functions or Productivity?
Answer>>
Question 4: In 1997, Cascade Corp. was aggressively pursuing market share in Europe, using the cost advantage offered by its recently consolidated manufacturing facilities (
Year 1997-SIC 3537)
What is the source of cost advantage: Rate, Approach to Managing Cost Functions or Productivity?
Answer>>
Question 5: In 1995, IPSCO, which was a completely non-union operation in Iowa, had a total labor content of 1.0 to 1.25 man hours per ton when fully operational. This advantage translated into nearly a $100 per ton cost advantage over Lukens. (
Year 1995-SIC 3312)
What is the source of cost advantage: Rate, Approach to Managing Cost Functions or Productivity?
Answer>>
Question 6: Although Lafarge is the second largest producer of cement, it is not as hard pressed as Holnam to serve large volume customers. Lafarge has a unique geographical focus. It has established its facilities and terminals along the Midwest water system, around the Great Lakes. Transportation by barge is half the cost of ground transport. Lafarge is able to ship its cement great distances. Lafarge can view its production on a larger geographical basis and not divide its operations into sections. However, Lafarge is limited geographically. Where the water ends, so do its markets. (
Year 1991-SIC 3241)
What is the source of cost advantage: Rate, Approach to Managing Cost Functions or Productivity?
Answer>>
Question 7: Michelin makes it a matter of policy to build its plants in non-union areas to avoid the higher labor costs that plague its competitors. Wages for employees of unionized plants are roughly 30% higher than those of their non-union counterparts. To gain this advantage, Michelin has built its domestic production facilities in South Carolina and Nova Scotia. (
Year 1994-SIC 3011)
What is the source of cost advantage: Rate, Approach to Managing Cost Functions or Productivity?
Answer>>
Question 8: The general operating principle of video-on-demand is that cable operators store movies as computer files on a server. One server can simultaneously deliver a copy of the same movie to 20,000 customers. Movies are shown on televisions on a set-top box that is really a computer. Made by Scientific-Atlanta, Motorola's General Instrument unit, and others these set-tops let consumers pause, stop, forward and rewind movies. (Year 2000-SIC 3663)
What is the source of cost advantage: Rate, Approach to Managing Cost Functions or Productivity?
Answer>>
Question 9: Both Shaw and Mohawk have pursued Economies of Scale through consolidation. The recent wave of plant closings and consolidations represents an effort by both competitors to eliminate redundancies and slash excessive overhead. (
Year 1996-SIC 2273)
What is the source of cost advantage: Rate, Approach to Managing Cost Functions or Productivity?
Answer>>
Question 10: Wilson designed its products to use a simplified but more expensive method to quickly make items distributors did not have in stock. Wilson could provide any product in 10 days, compared to 25 for Formica. This method also cut inventory costs. (
Year 1990-SIC 3089)
What is the source of cost advantage: Rate, Approach to Managing Cost Functions or Productivity?
Answer>>