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New Venture Strategies

New Venture Strategies. Session # 2 - 3. PIRNAY Fabrice 2002 - 2003. Le « menu du jour ». 1. Strategy as value creation 2. Cost strategy Economies of scale Learning curve Economies of scope Network economies Transaction costs Other costs. 1. Strategy as value creation.

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New Venture Strategies

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  1. New Venture Strategies Session # 2 - 3 PIRNAY Fabrice 2002 - 2003 NVS 2002-2003

  2. Le « menu du jour » 1. Strategy as value creation 2. Cost strategy • Economies of scale • Learning curve • Economies of scope • Network economies • Transaction costs • Other costs NVS 2002-2003

  3. 1. Strategy as value creation NVS 2002-2003

  4. 1. Strategy as value creation A little game • A market with two firms : i and j • Sell an identical product • Face the same demand function: Q=10-P • Same unit costs of 6 • Fix their price simultaneously • Play only once • If Pi< Pj thenQ i = 10-Piand Q j =0 • If Pi= Pj thenQ i = Q j = (10-Pi)/2 • What is the strategic price level? • If there is only one firm on the market? • If both firms are playing? NVS 2002-2003

  5. 1. Strategy as value creation Why is it so ? • Perfect information • Undifferentiated products • Identical costs • No collusion • Mobile resources (flexibility) NVS 2002-2003

  6. 1. Strategy as value creation The drivers of value creation • Optimal costs • Competitive positioning • Timing, flexibility and speed • Development and use of all tangibles and intangibles assets • Protect from competition and imitation • Reduce uncertainty • Manage, control and implement NVS 2002-2003

  7. 1. Strategy as value creation The drivers of value creation • Optimal costs • Competitive positioning • Timing, flexibility and speed • Development and use of all tangibles and intangibles assets • Protect from competition and imitation • Reduce uncertainty • Manage, control and implement NVS 2002-2003

  8. 2. Cost strategy 2.1. Economies of scale 2.2. Learning curve 2.3. Economies of scope 2.4. Network economies 2.5. Transaction costs 2.6. Other costs NVS 2002-2003

  9. 2. Cost strategy 2.1. Economies of scale • Reduction of unit cost with volume • Short term vs. Long term a) Short term : amortization of fixed costs b) Long term: technological effect NVS 2002-2003

  10. 2. Cost strategy 2.1. Economies of scale :STRATEGIC IMPLICATIONS • Strategic choice and level of risk due to fixed costs ; • Entrepreneuring requires often flexibility which is incompatible with fixed costs ; • Link with the globalization of markets. NVS 2002-2003

  11. 2. Cost strategy 2.2. Learning curve • Reduction of unit cost with cumulatedvolume • The sources of the learning effects NVS 2002-2003

  12. INDUSTRY PRICE COMPANY COST Log Price or cost per Unit C l C’s loss CURRENT PRICE A’s gross profit margin B l A l Log Experience (cumulative volume) 2. Cost strategy 2.2. Learning curve NVS 2002-2003

  13. 2. Cost strategy 2.2. Learning curve :STRATEGIC IMPLICATIONS • One could fix the penetration price in anticipation of learning effects => barrier to entry • Link with market growth NVS 2002-2003

  14. 2. Cost strategy 2.2. Learning curve :LIMITS • Difficult to assess ex-ante • Are not automatic (must be managed) • Important mostly for complex products/processes • The expertise must be proprietary to the firm NVS 2002-2003

  15. 2. Cost strategy 2.3. Economies of scope • Notion of synergy • C(y1, y2)< C(y1, 0) + C(0, y2) • Sources • Indivisibility of tangible and intangible assets • Optimal exploitation of some assets • Important link with a rationale for diversification NVS 2002-2003

  16. 2. Cost strategy 2.4. Network economies • Sources • Bandwagon effects NVS 2002-2003

  17. 2. Cost strategy 2.5. Transaction costs • Why do firms exists? (Coase and Williamson) • Cost/benefit analysis of internalization NVS 2002-2003

  18. 2. Cost strategy 2.5. Transaction costs :STRATEGIC IMPLICATIONS • Link with the strategy of subcontracting • This is not a black-or-white situation NVS 2002-2003

  19. 2. Cost strategy 2.6. Other costs • Sunk costs • Switching costs • Costs associated with growth (notion of time compression diseconomies) NVS 2002-2003

  20. Summary … • Economies of scale • Learning curve • Economies of scope • Network economies • Transaction costs • Other costs NVS 2002-2003

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