Studying this chapter should provide you with the knowledge to: 1. Differentiate between economies of scale and scope and describe how both produce cost advantages. 2. Describe what an experience curve is and how it can be used to make effective business decisions.
3. Discuss sources of lower input costs and how they provide the basis of a cost advantage strategy. 4. Explain two changes in a firm’s business model that can enable a cost advantage strategy.
The World’s Cheapest Car
One rainy day in Mumbai, India, in 2003, Ratan Tata, former chairman of the Tata Group, noticed a man riding a scooter with an older child standing in the front, behind the handlebars. The man’s wife sat sidesaddle on the back of the scooter with another child on her lap. All four were soaked to the bone. As Tata watched, he asked himself, “Why can’t this family own a car and avoid the rain?” Then he realized that, like over 700 million Indians who made less than $io,000 a year, they probably couldn’t afford one. Tata could not get the sight of that family out of his mind. He began to dwell on the possibility of creating an affordable “people’s car.” “The two-wheeler observation [with the family of four piled on the scooter] got me thinking that we needed to create a safer form of transport,” Tata recalls. “My first doodle was to rebuild cars around the scooter, so that those using them could be safer if it fell. Could there be a four-wheel vehicle made of scooter parts?” Tata gathered a small group of engineers to design a low-cost vehicle with four wheels. The initial design had two soft doors with vinyl windows, a cloth roof, and a metal bar as a safety measure. But after seeing the initial designs, Tata and his group concluded that the market wouldn’t want a “half car.” So Tata and his team spent the next several years designing a “real” car that would use the least expensive 1-1-
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