Cost, supply, and strategy

1. Cost, supply, and strategy Paul C. Godfrey Mark H. Hansen Marriott School of Management

2. The Global Shipping Industry: Asia, 2009 OR

3. The experience curves and costs

4. How can managers use/ influence cost to create competitive advantage?

5. Opportunity costs • The price paid to induce an actor to do X and not the next best thing • Accounting costs + opportunity costs = true costs • What’s the true cost of your BYU MBA? • It may be • Tuition + lost wages • Tuition + increased family stress • Tuition differential (HBS-BYU) + Opportunity differential (HBS - BYU) • Opportunity costs matter because they reflect what you chose NOT to do

6. Understand costs • Understand which costs are fixed and which costs are variable • Understand how total costs get allocated • Fixed costs on square footage vs. sales volume • The difference between profitable and unprofitable • Activity-based costing schemes are very helpful • Identify and understand opportunity costs • Understand the time frame for relevant costs • Marginal (short term) • Average (long term)

7. Marginal costs matter • Would you buy a 6th tire for your car? • We intuitively understand marginal costs • Make them explicit in decision making

8. Productivity is the crucial metric • The fallacy is that what you pay drives costs • The case of the hand-held scanners • Why is any production done in high cost countries? • It’s what you get for what you pay that matters • Hand held scanners radically improve productivity all along the line • High cost labor works when it is more productive • It’s all about productivity

9. It costs money to lower costs Cost reductions aren’t free • Investments in new technology and processes • Investments in knowledge and skill • Investments in changing organizational behavior and routines • Investments in personal change