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1.

a ) Economies of Scale and learning effects are two terms which increase the efficiency of a
company. Describe how these two terms affects efficiency of a company. What is Diseconomies
of scale.?

Economies of scale are unit-cost reductions associated with a large scale of output. Both manufacturing and service
companies can benefit from economies of scale.
00. One source of economies of scale is the ability to spread fixed costs over a large production
volume.
00. Another source is the ability of companies producing in large volumes to achieve a greater
division of labor and specialization. Specialization improves employee productivity because it
enables individuals to become very skilled at performing a particular task.
00. Economies of scale raise ROIC in two ways. They reduce spending on COGS, SG&A, and R&D
as a percentage of sales, improving return on sales. They also make more intensive use of existing
PPE, increasing capital turnover.
Learning effects refer to cost savings that come from learning by doing. Labor productivity increases as individuals
learn the most efficient way to perform a particular task and managers learn how best to run the operation.
00. Learning effects are most important in a technologically complex task that is repeated, and are
really important only during the start-up period of a new process. The importance of learning
effects tends to cease after two or three years.
00. Although economies of scale move a firm downward along the unit cost curve, learning effects
shift the entire curve downwards.

The Impact of
Learning and
Scale
Economies on
Unit Costs

Diseconomies of scale
Unit cost increases associated with a large scale of output
Increased bureaucracy associated with large-scale enterprises
Resulting managerial inefficiencies

Figure 4.2

1.b Write about the advantages and disadvantages of adopting a just-In-Time inventory system?

Improving the efficiency of the materials-management function typically requires the adoption of
a just-in-time (JIT) inventory system, which is designed to economize on inventory holding costs
by having components arrive at a manufacturing plant just in time to enter the production process
or to have goods arrive at a retail store only when stock is almost depleted. The major cost saving
comes from increasing inventory turnover, which reduces inventory holding costs, such as
warehousing and storage costs, and the companys need for working capital.
JIT inventory systems reduce the need for working capital (because there is less inventory to
finance) and fixed capital to finance storage space (because there is less to store). This reduces
capital needs, increases capital turnover, and, by extension, boosts the return on invested capital.

The drawback of JIT systems is that they deny companies buffer stocks of inventory. Although
buffer stocks are expensive to store, they can help tide a company over shortages of inputs
brought about by disruption among suppliers (for instance, a labor dispute at a key supplier) and
can help a company respond quickly to increases in demand.
However, there are ways around these limitations. For example, to reduce the risks linked to
dependence on just one supplier for an important input, a company might decide to source inputs
from multiple suppliers.

1.c In The long run, will adoption of six Sigma quality improvement process give a
company a competitive advantage, or will it be required just to achive parity with
competitors. Explian briefly
Six Sigma has two key methodologies:
DMAIC: It refers to a data-driven quality strategy for improving processes.
This methodology is used to improve an existing business process.
DMADV: It refers to a data-driven quality strategy for designing products &
processes. This methodology is used to create new product designs or
process designs in such a way that it results in a more predictable, mature
and defect free performance.

Define --> Measure --> Analyze --> Improve -->Control


Define: Define the problem or project goal that needs to be addressed.
Measure: Measure the problem and process from which it was produced.
Analyze: Analyze data and process to determine root causes of defects and
opportunities.
Improve: Improve the process by finding solutions to fix, diminish, and
prevent future problems.
Control: Implement, control, and sustain the improvements solutions to keep
the process on the new course.

2.a Describe Briefly about Segmentation


Customer needs and product differentiation (Contd)
All companies must differentiate their products to a certain degree in order to
attract customers and satisfy some minimal level of need.
However, some companies differentiate their products to a much greater
degree than others, and this difference can give them a competitive edge.
Customer Groups and Market Segmentation
Market Segmentation
The way customers can be grouped based on important differences
in their needs or preferences
Main Approaches to Segmenting Markets
1. Ignore differences in customer segments (No market segment)

Make a product for the typical or average customer


1. Recognize differences between customer groups (High
segmentation)
Make products that meet the needs of all or most customer groups
1. Target specific segments (Focused segmentation)
Choose to focus on and serve just one or two selected segments
Identifying Customer Groups

and Market Segments

2.b What are the reason for high failure rate of new products and generate an
economic return?

The High Failure Rate

of Innovation

Failure rate of innovative new products is high


with evidence suggesting
that only 10 to 20% of major R&D projects give rise to a commercially viable
product.

Most common explanations for failure:

Uncertainty

Quantum innovation radical departure with higher risk

Incremental innovation extension of existing technology

Poor commercialization

Definite demand for product

Poor positioning strategy

Good product but poorly positioned in the marketplace

Price, distribution, promotion and advertising, features

Technological myopia

Product not well adapted to customer needs

Technological wizardry vs. meeting market requirements

Slow to market

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