Practice Essay for 2017 HSC Band 6 PDF

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Response to HSC extended response question Band 6...

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Evaluate how operational influences will impact on a cost leadership approach. Evaluate: Make a judgement       

Globalisation – Apple/Nike Technology – Woolworths/Tesla Quality – Tiffany & Co Cost-based competition – Dominos Government Policies – McDonalds Legal regulations – Google Environmental sustainability – Ikea

Cost leadership – Being price competitive    

Eliminate waste Economies of scale Standardised products Automated products

Cost-based competition – Economies of scale – Dominos Globalisation – Standardised products – Apple Technology – Automated products – Tesla Government Policies – Reduce legal compliance - McDonalds Essay: Operational influences have a significant positive impact on a cost leadership approach. The influences of cost-based competition, globalisation, technology and environmental sustainability all improve the ability of businesses to produce their products cheaply and be more price competitive. We can see this through the case studies of Dominos, Apple, Tesla and Ikea. The need for cost-based competition has a significant impact cost leadership through economies of scale. As businesses need to reduce costs to a minimum in order to gain a competitive advantage over rivals, this leads them to look for methods to increase productivity. By producing on a mass scale, businesses can utilise the cost saving advantages (economies of scale) associated to reduce costs. Dominos has utilised this to great effect. To compete with competitors such as Eagle Boys and Pizzahut, Dominos has utilised economies of scale by mass producing the ingredients for their pizza. These are then transported to individual stores, but by producing them in bulk costs have been significantly reduced. This has allowed them to sell their ‘$5 value range’ of pizzas, a significant edge over smaller competitors. This has allowed them to gain a 25% market share of the takeaway pizza industry in Australia, and forcing smaller competitors such as Eagle Boys out of business. Therefore cost-based competition has had a significant impact on economies of scale. Globalisation has a significant impact on cost leader ship as it gives businesses the ability to mass produce standardised products. Businesses can now take advantage of the increased integration between countries to significantly reduce costs associated with producing products. Outsourcing utilises the differences between countries to achieve cheaper labour and reduced legal compliance costs. Apple has used this to great effect by outsourcing production of their phones to China through the company Foxconn. Here phones are produced in massive factories, with workers working 12 hours a day for 6 days a week, getting paid as little as $17 a day. The difference between labour laws

in China and their home country of the US allows them to significantly reduce production costs. The standardised nature of the products makes them ideal for outsourcing and a mass factory production environment as customisation is not required. The use of globalisation allows Apple to produce their phones at less than 1/3 of the final sale cost. Thus globalisation has a significant impact on production of standardised goods. Technology has a significant impact on cost leadership, through the automated manufacturing of many goods. Due to technology such as robotics, computer aided design (CAD) and computer aided manufacture (CAM) as well as leading edge technology such as AI run transport devices, businesses are able to significantly reduce the costs of production by increasing their efficiency. Tesla has utilised this to great effect through their ‘Gigafactory’, where robotics and AI run ‘SmartCarts’ allow them to produce electric cars and batteries with much greater efficiency. Through the automation of most of the transformation process, coupled with vertical integration of many aspects of the plant, Tesla has been able to produce over 3.5 million battery cells a year. The large capital costs of innovative technology has largely been outweighed by the reduced reliance on labour and the significantly increased productive capacity, allowing maximum cost reduction. Hence, technology has significantly impacted cost leadership through automated manufacturing. Legal regulations have also had a significant impact on cost leadership, through encouraging businesses to avoid them by basing themselves in tax havens. Countries can impose high company tax rates on profits made in that country, so by being based in a ‘tax friendly’ nation such as the Cayman Islands, businesses can reduce compliance costs. Additionally, by basing production within a country, a business could avoid tariffs imposed on imports from outside countries, increasing the profitability of the company. McDonalds has utilised tax avoidance to significantly reduce their necessary compliance costs. They relocated their European headquarters from London to Geneva in order to take advantage of their lower company tax rate. National McDonalds were then charged high “service fees” and as a result they are expected to save almost $2 billion in tax from 2009-2013. Legal regulations have a significant impact on the legal compliance fees associated with running a business. The operational influences of cost-based competition, globalisation, technology and legal regulations have a significant positive impact on cost leadership. By affecting strategies such as economies of scale, mass production of standardised products, automated manufacturing and reduction of compliance costs, it reduces the cost of producing products and increases the profitability of businesses. Therefore it is a significant boon in allowing businesses to achieve their cost leadership goals....