ms-91 mba assignment july dec 2010 Question 6

6. Write short notes on the following:-

A)Experience Curve

The Experience Curve

In the 1960's, management consultants at The Boston Consulting Group observed a consistent relationship between the cost of production and the cumulative production quantity (total quantity produced from the first unit to the last). Data revealed that the real value-added production cost declined by 20 to 30 percent for each doubling of cumulative production quantity:

The Experience Curve

The vertical axis of this logarithmic graph is the real unit cost of adding value, adjusted for inflation. It includes the cost that the firm incurs to add value to the starting materials, but excludes the cost of those materials themselves, which are subject the experience curves of their suppliers.

Note that the experience curve differs from the learning curve. The learning curve describes the observed reduction in the number of required direct labor hours as workers learn their jobs. The experience curve by contrast applies not only to labor intensive situations, but also to process oriented ones.

The experience curve relationship holds over wide range industries. In fact, its absence would be considered by some to be a sign of possible mismanagement. Cases in which the experience curve is not observed sometimes involve the withholding of capital investment, for example, to increase short-term ROI. The experience curve can be explained by a combination of learning (the learning curve), specialization, scale, and investment.

 

Implications for Strategy

The experience curve has important strategic implications. If a firm is able to gain market share over its competitors, it can develop a cost advantage. Penetration pricing strategies and a significant investment in advertising, sales personnel, production capacity, etc. can be justified to increase market share and gain a competitive advantage.

When evaluating strategies based on the experience curve, a firm must consider the reaction of competitors who also understand the concept. Some potential pitfalls include:

·        The fallacy of composition holds: if all other firms equally pursue the strategy, then none will increase market share and will suffer losses from over-capacity and low prices. The more competitors that pursue the strategy, the higher the cost of gaining a given market share and the lower the return on investment.

·        Competing firms may be able to discover the leading firm's proprietary methods and replicate the cost reductions without having made the large investment to gain experience.

·        New technologies may create a new experience curve. Entrants building new plants may be able to take advantage of the latest technologies that offer a cost advantage over the older plants of the leading firm.

b) Customer Defections

Why do customers defect?

The reality is that many businesses lose a significant number of customers of their customer base every single year and either don’t know who these customers are, why they are leaving or spending less.

Why are customers lost?

Price:

While it may be important in attracting new customers it would seem that it is a minor issue in developing loyalty and retaining customers. Most of the research on price puts it as only relatively important as it accounts for only about 15% of the reason why customers switch

Physical factors:

Such physical factors as a more convenient location are also ranked quite low, as are competitor action and invention. Marketing and competitor activity and relationship with a competitor are a bout 15%. The competitor products advantages account for further 10% to 15%.

The most important and common reasons for customer switching is the indifference and inattention of the business and from the customers point of view the lack of any real reason to stay.

Customer sophistication:

Customers not only expect and demand more they are also more articulate in saying so. Twenty years of dramatic social change have changed the way most of us select the businesses we use.

Complexity:

Buying the most simplest product or service can, if the customer wishes be a very complex decision making process. The blurring of differences between brands, products and companies.

Competition:

In almost every market in every developed country of the work, competition has increased dramatically in the last ten years. Globalization and advance manufacturing technology have resulted in businesses becoming faster and improving product quality.

Costs:

Costs play a significant role in understanding the economic trends and changes in recent years. The economic downturn of the early nineties gave birth to the business customer and the personal consumer which showed that markets can go down as well as up. Therefore it is very important to ensure that we get more value for money in purchasing and choosing suppliers.

Here are some of the key reasons why customers switch:

• Too little contact
• Too little individual attention
• Poor quality attention – especially when problems are encountered
• Generally poor service levels and standards

 

      In non-commercial organizations or utility providers where changing suppliers or switching business is more difficult - the four factors mentioned above are at the root of the majority of complaints. It is obvious that any improvement in the above four areas usually reduces the number of customers that are defecting.

 

Serving customers profitably

Carrying out customer profitability analysis ensures that you develop long term relationships that will ensure long term profitable relationship. Many businesses spend 75% of their marketing budget in the search for more new customers. This is a mistake and has a negative impact on profits. Let us look at how you can calculate the true value of existing customers.

• It costs substantially more to win new customer than it does to keep a current customer
• The longer a business keeps a customer – the more profitable that customer is for the business
• As a customers lifetime value grows the more dependent they become on the company and less susceptible to competitor offers
• As customers become more loyal they become advocates for the business encouraging friends and acquaintances also to buy there.

c) Joint Ventures

A JV on a continuing basis is the normal business undertaking. It is similar to a business partnership with two differences: the first, a partnership generally involves an ongoing, long-term business relationship, whereas an equity-based JV comprises a single business activity. Second, all the partners have to agree to dissolve the partnership whereas a finite time has to lapse before it comes to an end (or is closed by the Court due to a dispute).

The term JV refers to the purpose of the entity and not to a type of entity. Therefore, a joint venture may be a corporation, a limited liability enterprise, a partnership or other legal structure, depending on a number of considerations such as tax and tort liability.

JVs are normally formed both inside one's own country and between firms belonging to different countries. Within one, JVs usually combine different strengths in a field or are formed because of legal restrictions within a country; for example an insurance company cannot market its policies through a banking company. Some JVs are also formed because the law of a country allows dispute settlement, should it occur, in a third country. They are also formed to minimize business, tax and political risks. The JV is an alternative to the parent-subsidiary business partnership in emerging countries, discouraged, on account of (a) ignoring national objectives (b) slow-growth (c) parental control of funds and (d) disallowing competition. JVs can be in the manufacture of goods, services, travel space, banking, insurance, web-hosting business, etc.

Today, the term 'JV' applies to more occasions than the choice of JV partners; for example, an individual normally cannot legally carry out business without finding a national partner to form a JV as in many Arab countries where it is mentioned that there are over 500 JVs in Saudi Arabia with Indians alone. Also, the JV may be an easier first-step to franchising, as McDonald's and other fast foods, found out in China in the early difficult stage of development.

Other reasons for forming a JV are:

• Reducing 'entry' risks by using the local partner's assets
• inadequate knowledge of local institutional or legal environment
• access to local borrowing powers
• perception that the goodwill of the local partner is carried forward
• in strategic sectors, the county's laws may not permit foreign nationals to operate alone
• access to local resources through participation of national partner
• influence of local partners on government officials or 'compulsory' requisite (see China coverage below)
• access by one partner to foreign technology or expertise, often a key consideration of local parties (or through government incentives for the mechanism)
• again, through government incentives, job and skill growth through foreign investment, and
• Incoming foreign exchange and investment.