New Venture Strategies

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