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It is possible that Berkshire Hathaway's competitive advantage is perfectly unique: Warren Buffet's mind. A perfectly competitive firm has only one major decision to make—namely, what quantity to produce. Many U.S. steel companies have seen their variable operating costs rise more quickly than those of Asian producers, and the capital costs of modernizing large, integrated mills seem prohibitive. Moreover, the size of the increase in capital requirements can impose a severe financial burden. A target cost is the maximum amount of cost that can … Maunders, Accounting for British Steel (Aldershot, England, Gower, 1982), p. 124. To illustrate the strategic payoff of constructing a value chain, look again at Exhibit I. When operating costs spiral upward faster than the costs of plant and equipment, a focus strategy can succeed if the company either concentrates on buyer groups that are less price sensitive or tries to build its product line around items that are least affected by cost changes. View Test Prep - Ch 4 quiz from MGT 590 at RMU. Many electric utility executives have begun to push the use of this approach. That’s in an industry that started from a base of $20 billion in sales and $3 billion in net income. For example, the Canadian surplus of cheap hydroelectric power and New England’s 30% electricity surplus threaten the once sound economics of New Hampshire’s Seabrook nuclear project (whose original estimated price tag of $1 billion for units 1 and 2 has ballooned to $5.2 billion). Harvard Business Publishing is an affiliate of Harvard Business School. This can be roughly … Exhibit II Value chains for U.S. and Japanese steel companies: a comparison between 1956 and 1976 Source: Compiled from data in the U.S. Federal Trade Commission, The United States Steel Industry and its International Rivals: Trends and Factors Determining International Competitiveness (Washington, D.C.: U.S. Government Printing Office, 1978) and in Robert W. Crandall, The U.S. Steel Industry in Recurrent Crisis (Washington, D.C.: The Brookings Institution, 1981). Manufacturing companies in such energy-intensive industries as pulp and paper, chemicals, and primary metals feel the competitive impact of fuel cost differences. Virginia Electric and Power Company, for example, will mothball a nuclear power plant, despite a $540 million initial investment, because the estimated final price tag has risen from $1.2 billion to $5.1 billion. To sustain the advantage, it must be able to recoup the cost suffered from temporary excess capacity when rivals finally add or replace plant and equipment at inflated costs. To use it, a company must recast its own historical cost accounting data into the principal cost categories that eventually make up the value of its product. A company that finds itself in a trap like XYZ’s can do something to get out of it. [List the factors that affect cost analysis and cost realism analysis considerations.] Southland Corporation saw its costs for new 7–Eleven convenience food stores rise because of the explosion in the industry. Nonetheless, if your business has relatively high and rising fixed costs per unit, successful cost leadership depends on the combination—and timing—of low capital investment and productive use of fixed assets. If all competitors feel the same inflationary impact on operating costs but the fixed asset-capacity cost increases that they suffer from differ greatly, then an “invest and grow” strategy to build market share can work to the advantage of a company, provided it invests early in new capacity. Cost-benefit Analysis dete… Otherwise, a strategy to be the cost leader will beat a performance-based differentiation strategy. In peak shopping seasons, businesses tend to spend more on advertising. But no asset shows a good year-by-year correlation with prices; even corporate equities and real estate are not good anti-inflationary hedges by this test. Therefore, in a perfectly competitive market, the main problem for a profit-maximizing firm is not to determine the price of its product but to adjust its output to the market price so that profit is maximized. Season. Nearly every electric utility that is constructing nuclear power stations to meet future generating needs is being squeezed by escalating capital costs and a market place replete with generating capacity. Both Sun Oil and IBM have benefited from committing investment capital on a timely basis to strategic moves designed to yield strong cost positions vis-à-vis their competitors. Ashland Oil figures it will reduce raw materials costs by 20% to 25% through a $240 million upgrading of its refineries. To be sure, they can never get a guarantee of future tuition costs, or the prospective price tag on their retirement home, or charges for large medical needs. Customers became so price sensitive that they cut their use of electricity and average loads from a rapid annual 6% to 8% growth rate down to a mature industry rate of 1% to 3%. Joseph A. Pechman (Cambridge, Mass. 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