Business Economics AND Management OF THE FIRM 2 PDF

Preview

Summary

BUSINESS ECONOMICS AND MANAGEMENT OF THE FIRM 2:SAMPLE QUESTIONS1) DEFINE WHEN TWO CHOICE VARIABLES ARE COMPLEMENTS.Complementarity gives rise to clear pattern of coherence in design and it involves the interactions among changes in different variables affecting performance. Two choice variables are...

Description

BUSINESS ECONOMICS AND MANAGEMENT OF THE FIRM 2: SAMPLE QUESTIONS 1) DEFINE WHEN TWO CHOICE VARIABLES ARE COMPLEMENTS. Complementarity gives rise to clear pattern of coherence in design and it involves the interactions among changes in different variables affecting performance. Two choice variables are complements when doing (more of) one of them increases the returns of doing (more of) the other. The opposite of complements are substitutes. The concept of complementary is true also with environmental variables (move from mass production to diversification). When products are complements, usually economies of scope can be exploited. Some examples of complements are price and quality if higher quality makes the demand less sensitive to price; performance pay and negative tax rates; flexibility of a firm’s manufacturing system and the variety of its product offerings; left and right shoe according to the definition of complementary goods in consumer’s theory. Some empirical example of successful systems involving complementarities are the Ford and the Toyota systems: they both worked despite their differences as their aims were different. Lincoln Electric Company also exploited the power of complementarities reaching the objective of lowering constantly the costs of production increasing the productivity and transferring the benefits to customers lowering the prices. However, matching complementarities is not always obvious: an example of failure is represented by the Southwest Airlines (S. Antonio, Texas): they wanted to offer a safe, reliable, short distance and low-cost transportation service. In order to make it possible, they made some “cuts” in the services, they preferred point-to-point routes, avoiding connecting flights and exploiting small, secondary airports. However, they ignored trade-offs, resulting inefficient. 2) WHAT ARE COMPLEMENTARY CHOICE VARIABLES? PROVIDE EXAMPLES OF COMPLEMENTS IN SOUTHWESTERN AIRLINES. Two choice variables are complements when doing (more of) one of them increases the returns of doing (more of) the other. If one of a pair of complements is introduced/increased it will be more attractive to introduce/increase the other. Frequent reliable departures, high capacity utilization and point to point routes are complements in the Southwest Airlines case. Frequent reliable departures increase capacity utilization by reducing waiting times; point to point routes

imply no propagation of delays and hence allow frequent reliable departures; point to point routes select travellers that prefer frequent reliable departures to connected flights. Such travellers also prefer less comfort but timely, cheap flights. 3) WHY DO COMPLEMENTARITIES IMPLY DISCONTINUOUS CHANGE? Complementarity gives rise to systems effects, with the whole being more than the sum of the parts. This means that, once we have raised the level of one of the activities, the impact of raising any of the other activities is greater than it would have been when the first variable was at a lower level. When variables are complements, changing any one of them alone would worsen performance, yet changing all together would increase it substantially (they must be all at low/high level). In fact, complementarities imply discontinuous change because it’s impossible to change one piece a time: coordination is needed in order to make large, simultaneous change along many dimensions. 4) WHAT ARE THE FOUR TYPES OF STANDARDIZATION ASSOCIATED TO FORDISM? There are four types of standardization: standardization of components, standardization of products, standardization of work and standardization of process. Standardization of components involves the use of new technologies to make the same component every time with precision mechanics, working also on hardened metals. This means that fewer components will be needed to build the car, reducing maintenance problems. Moreover, the issue of re-fitting of parts in this way can be avoided. Standardization of products refers to the case of Model T, the first car produced by Ford during the first decades of the 20th century with the system of the supply chain (mass production). Model T, was in fact standardized, meaning that Ford didn’t produce any other model (even the colour was standard: black). With this system, less human effort and capital were needed, economies of scale could be exploited, as producing large quantities of the same product allow lower costs of production, making the product also less costly and more affordable (also factory workers, after 4 months work could buy Model T). Standardization of work means that specialization is not required, and every worker performs quick, simple, repetitive tasks that are easy to be learnt. In this way training workers is simplified, as cycle time and complexity are reduced, eliminating the waste of time. Standardization of process instead, involves the utilization of dedicated

machines, designed to repeat always the same operation, meaning that they deal only with a specific part of the production cycle. This eliminates the setup time that would be required in order to change task: the result is an increment in efficiency and rigidity of the working environment. Furthermore, vertical integration was applied, in order to obtain advantages in precision, coordination in the design of fitting components and in scheduling, deleting issues related to mistrust and transaction costs. As geographic development led to some problems, component production was centralized, while assembly was geographically decentralized. In this way, also the problem of Taylor (soldiering) relative to the human tendency to minimize effort can be solved: tasks are standardized; tasks are simplified, and time and motion are reduced. 5) WHAT ARE THE ADVANTAGES OF PRODUCING A SINGLE, STANDARDIZED PRODUCT (MODEL T)? The main advantages of producing a standardized product, such as Model T for Ford, involve the fact that production costs can be reduced. In fact, producing a single product means that work can be standardized and there’s no need to employ specialized workers, meaning that there’s no need of a specific, timerequiring training. In this way, the waste of time is strongly reduced, as mobile work transforms in the possibility for employers to stay in fixed work stations. Moreover, also components can be standardized, making it easy to replicate and eventually to substitute them. Also, the process can be standardized, avoiding the setup costs. As producing is less expensive, mass production is made possible exploiting economies of scales: this allows lower prices, meaning that a larger amount of people can afford to buy the product. 6) WHAT IS THE MAIN PRODUCTIVITY CONTRIBUTION OF THE ASSEMBLY CHAIN? In 1913, William “Pa” Klann invented the assembly line after his return from visiting a Chicago slaughterhouse. He got inspired as animals where butchered as they moved along a conveyor. The conveyor belt was consequently introduced: it was a low-cost investment that was more than compensated by the inventory reduction. It helped workers to stay in a fixed position, reducing dramatically the waste of time. The consequence was the synchronization of workers and the reduction of the waste of time (much faster process).

7) WHAT IS THE DIFFERENCE BETWEEN PUSH AND PULLSYSTEM? Basically, the push-system, adopted by Ford, is make-to-stock. At the contrary, the pull-system, used by Toyota, consist in make-to-order. The aim of Toyota was rethinking mass production (produce what is needed when it’s needed) increasing product variety, flexibility and productivity, eliminating excess inventory. In order to realize the objective, Toyota decided to adopt the pull-system: production was based on the observation of the demand and on the eventual refill (demand pulls the system) instead of on forecasting the demand (plan pushes the system). By doing so, they reduced inventory costs as there were much less immobilized resources. In order to do it, Toyota went towards producing small lots, increasing the quality of production (flexible systems are able to respond to the market demand) and always trying to find the optimal quantity of production (EOQ). A smaller setup time and costs correspond to a smaller optimal quantity that allows the reduction of the inventory. To guarantee a high-quality process, workers received more training and they were required to work together without hierarchy, learning each skill as they needed to be able to be involved in the entire process (job rotation). The push system is based on rigid production plans that are based on demand forecast. It is “make-to-stock” as products cumulate in stocks till customers buy them. The pull-system is more flexible and responsive to demand, as it is based on orders and “follows” the demand (“make-to order”). To be able to “follow” the demand, a pull-system must be able to change flexibly the quantity of different products. It must thus be able to make many small productions lots to adjust the mix of production to demand. It must also find ways to transmit information backwards along the sequence of operations (for instance, via Kanban system). To make it economical to produce small lots, it is crucial to reduce the setup cost, such as the cost of shifting from one production to another. This cost is due to the time it takes to reset the production process to be used on different products (for instance, to chance the dies used to cut metal in a given shape). EOQ=(2sD/H)^1/2. 8) WHY DOES THE PULL-SYSTEM REQUIRE SMALL PRODUCTION LOTS?

The pull-system requires small production lots because it needs to adjust the mix of production to demand. In fact, this system needs to be flexible and responsive to the market demand, changing flexibly the quantity of different products. In order to facilitate the transmission of info backwards, along the sequence of operation, the Kanban system is often used: it is based on taking the components from a small amount and refill when the amount is finished. Moreover, large production batches cover coordination problems along the process. Reducing the lot size forces problems to the surface. In order to describe this, a metaphor can be used: if a pond has a very irregular surface, but water is too high to see the irregularities, the only way to make the surface become smooth is to reduce the quantity of water so you can solve the problem (water represents the assembly inventories). To make it economical to produce small lots, it is crucial to reduce the setup cost, such as the cost of shifting from one production to another. This cost is due to the time it takes to reset the production process to be used on different products (for instance, to chance the dies used to cut metal in a given shape). 9) WHAT IS THE “LADDER OF SUCCESS”? “We don’t drive a car if we don’t know driving regulations and the meaning of road signs.” From the beginning of time, the “components” of the “ladder of success” are: ● Desire: “If you want something badly enough you will get it.” ● Positive attitude and optimism work like a magnet for success. If you maintain positive attitude no matter what the situation is, success will come to you automatically. ● Persistence: success never comes at first attempt. Whatever your goal is there will be obstacles on your way to success. For example, Walt Disney was turned down 302 times before he got financing for his dream of creating the “Happiest Place on Earth”. ● Goal setting helps you to create step-by-step plan to your success. 10) IN THE WORK POLICIES AT FORD AND TOYOTA? Ford’s production system was based on standardization. This means that also work was standardized: there was no need to employ skilled and specialized workers, as each of them needed to perform just a few, repetitive and simple tasks that required just a little training in order to be learnt. As work didn’t require any specific ability, the turnover was very high and, as in the first decades n the 20th century immigration was very intense, many immigrants

were employed. Workers performed their activities in fixed work stations, in order to eliminate the waste of time and to reduce the complexity, as operations were done one at a time. The problem of Taylor of the human tendency of minimizing effort (soldiering) was solved by simplifying and standardizing the task, and by reducing the waste of time (scientific management). Despite all the advantages of mass production, working in Ford had also many disadvantages: there was a high turnover, very low salaries, many working hours, anti-unionism and the “social policy” of Ford. By mid20s, Ford’s decline started: households ‘power started growing, there was strong need of differentiation, competitors introduced modern mechanical features and a better design, there were new advertising techniques that associated car brand with social status, sex appeal and power (only low income families started buying Ford’s cars), there were financial policies and the whole social model of Ford faced a crisis because of unionism and criticism of the alienated work within the firm. As Ford’s production system was becoming obsolete (excess of production, uneven amount of work performed in various departments, amount of rework due to defects), Toyota decided to rethink mass production after World War II. The pull-system was adopted. This system was flexibility and quality based (kaizen=continuous improvement), meaning that precision was required: the role of workers was fundamental to guarantee it. In fact, they needed to run integration and maintain the machines (visual control required). Moreover, one of the main differences with the Ford system is job rotation: workers needed to know how the whole process works in order to improve their ability and their knowledge, avoiding “errors” in production. The work was divided in cells, meaning that operations were sequential (not on a line), improving help and relationships between workers. Employment was valid for the whole lifetime and the firm was seen more as a community. Instead of sustaining hierarchical positions, team leaders were preferred to supervisors. 11) WHY ARE INVENTORIES SO IMPORTANT IN THE TOYOTA SYSTEM? The aim of Toyota was the one of rethinking mass production in order to respond to new consumer’s needs of diversified products. This is why the firm adopted the pull-system. In order to make it work, Toyota needed to consider both inventory and setup costs. Inventory costs are the larger ones (logistic costs, space). Setup costs instead deal with the waste of time that is required from

passing from an operation to another. We can think as the total cost function as the sum of setup and inventory costs. The equilibrium optimal quantity of production in given by the formula EOQ=(2sD/H)^1/2, meaning that reducing setup costs, the equilibrium optimal quantity of production will be smaller, so, less inventories will be consequently required. Moreover, the Kanban system, based on consumption in small quantities and refill, was adopted. Also, the Muda system was chosen, in order to reduce wastes, such as 1) overproduction, 2) unnecessary transportation, 3) inventories 4) motion, 5) defects 6) over-processing, 7) waiting. 12) HOW DID TOYOTA EXTEND THE JUST-IN-TIME SYSTEM TO SUPPLIERS? As a consequence of the pull-system, Toyota wanted to stabilize and develop longterm relationships with specialized customers and suppliers. Relations with suppliers needed to be strong in order to have stable and reliable material flows from them: suppliers needed to provide continuously small lots, delivered to the assembly plant. As a consequence, interruptions in the production system were minimized. Co-localization resulted fundamental in order to allow it. Because the quality of Toyota’s products relied on outside suppliers for most of the parts and the materials, suppliers were strictly selected, they were multiple and competitive on prices: suppliers needed to have the will and the ability to become active partners with Toyota and to possess good competencies in terms of quality, cost, delivery and technological capabilities. Moreover, in order increase the quality of the product, information were shared with suppliers, that participated actively also to the product design. 13) WHAT IS CONVEXITY OF THE SET OF ALTERNATIVES? HOW DOES TECHNOLOGICAL INDIVISBILITY VIOLATE CONVEXITY? Convexity of a set of alternatives means that if two options are available, any intermediate choice is also available. As a consequence, choices are infinitely divisible. There is an optimum and you can always reach it by making an intermediate move. However, the principle of convexity cannot be applied to systems with complementarities because of indivisibilities, huge discontinuities that break convexity, that can be both technological (capacity), or related to the market (in/out). Technological indivisibility violates convexity because a firm cannot, for instance, have a fractional number of

plants, meaning that an intermediate solution is not available: a choice between the two options needs to be done without compromises. The same holds for the market, as a firm cannot be in an intermediate situation between entering a market or not. 14) WHAT IS CONCAVITY OF THE OBJECTIVE FUNCION? HOW CAN ECONOMIES OF SCALE VIOLATE IT? WHY DOES NONCONCAVITY IMPLY MULTIPLE CONFIGURATIONS OF CHOICE VARIABLES, WHICH ARE LOCALLY STABLE? WHY DOES THIS IMPLY THE RISK OF “LOCK-IN” IN SUBOPTIMAL SOLUTIONS? PROVIDE AN EXAMPLE OF “LOCK-IN” N SUBOPTIMAL SOLUTIONS. Concavity of the objective function deals with the nature of the relationship between choice and performance for a given environment. If two distinct choices lead to the same performance than any choice intermediate between the two would lead to a higher level of performance. After a shock of the system, there is a new state with a single peak: no matter what it happens the maximum can be reached. However, effects of complementarity, economies of scale and learning economies (competence traps) violate this assumption. When dealing with complements, in fact, there are multiple solutions and combinations (multiple maxima and minima) of the use of inputs. What’s more, talking about economies of scale, costs fall by increasing capacity, however, at a certain point, they can rise again (diseconomies of scale, capacity constraints). Learning traps represent another example of nonconcavity: when a new technology is introduced, there are two curves that represent the previous and the latter situation. As the latter is more efficient than the other, a “jump” is needed when changing from the first function to the second one. Some firms cannot afford to have some losses, meaning that they cannot do any change for improvement and they get trapped, violating the concavity assumption. Furthermore, as complementarities can be represented by multiple peaks, big changes of multiple variables are needed for moving from a local maximum to a higher or simply different one (higher/different level of performance): before going “up”, going “down” is required, risking to get stuck in the middle, in a worse situation, when the change is not complete/global, as search of the optimum and change must be coordinated (threshold of change: find the point beyond which incremental change will lead to a new stable configuration). Sometimes the optimum

cannot be even found. The “lock in” happens when a firm cannot move from a technology to another because of these factors. An example of “lock-in” is represented by the QWERTY keyboard. It was invented with separate letters in order to avoid mistakes (making the process of typing slower) as they couldn’t be delated when using typing machines. Now, even if this problem isn’t still present, keyboards keep having the same configuration, as changing what people have learnt is too difficult/costly. Another example is represented by Ford, when the only car produced was Model T. In fact, when Ford needed to introduce Model A in order to satisfy the market, the obsolesce of the production system emerged. 15) WHAT IS POSITIVE FEEDBACK? The old industrial economy was driven by economies of scale; the new information economy is based on economics of network. The value of connecting to a networ...