Executive Economics by SHLOMO MAITAL

Author:SHLOMO MAITAL
Language: eng
Format: epub
Publisher: THE FREE PRESS
Published: 1994-07-15T00:00:00+00:00

the place to find unit volume is the bottom of the market, where low prices create new customers. 1

Recognizing this, both Compaq and IBM—firms which once enjoyed success by extracting large price premiums for the quality their brand name implied—have moved to slash prices, increase volume, and reduce costs. After adopting a mass-market low-cost strategy, Compaq managed to slash its costs by 30 percent in only eight months. It was not simple. As Dell Computer Co. founder and CEO Michael Dell succinctly summarizes: “Ideas are a commodity. Execution of them is not.” 2

The videocassette recorder (VCR) industry is another good example of a learning-curve-driven market. Although the basic technology of the VCR was pioneered by an American firm, Ampex, in the 1950s, and remained the industry standard into the 1980s, no American company managed to produce and commercialize a videorecorder for the consumer market. In contrast, JVC (Victor Corp. of Japan, ironically, originally a subsidiary of the Victor Co. of America), the subsidiary of the largest Japanese consumer electronics firm Matsushita, assembled a special team to design a video home system (VHS). The project manager, whose team included experts in marketing, production, and design, was told not to ask what was technologically possible—often, the chief aim of design engineers—but rather “to determine what consumers wanted in a home VCR and then to develop the technology to meet those requirements.” The emphasis was placed on “producibility”—the ability to manufacture VCRs with steady, substantial cost reductions driven by the learning curve, rather than creation of technological excellence (which might possibly have been difficult or impossible to mass produce). The result was the VHS technology that ultimately surpassed what some experts regard as a technologically superior one, Sony’s Betamax system, and that was eventually licensed by JVC to seven other Japanese firms in 1977. It yielded a design synthesis “well matched to the needs of the mass market”—a necessary condition for the very creation of such a mass market.

By 1978, worldwide demand exceeded one million units. World demand doubled every year between 1978 and 1981. At its peak in 1986, 35 million VCRs were produced, 88 percent of them by Japanese firms. Unit prices dropped rapidly, and the firms with the largest market share were able to raise their shares even further by drastic price cuts. It was a classic market-share race driven by mass-production and learning-curve cost cuts. 3

How could a technologically superior product—Betamax— lose out to a less sophisticated product—VHS—in the fierce competition for consumers’ hearts and dollars? It happens all the time. The ability to manufacture large quantities of a product, at acceptable quality, and achieve low prices through cost reductions driven by learning curves holds the key. This is a brief and accurate summary of what occurred in many industries, including automobiles and motorcycles.

Learning curves are not only a good way to manage and predict a company’s own cost structure, they are also helpful in estimating unit costs of competitors. Here is an example of how a college professor,

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