Want Fries With That M&A?

Thursday, December 15, 2005
Businessweek.com
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Refer to Chapter 09

Diseconomies of Scale

"Economies of scale" in production means that long run average costs decline as a firm's production level rises; this is characteristic of many types of production such as autos and cruise ships (as mentioned in chapter 9). Yet it is possible that a firm may become so large that any economies of scale are exhausted, and instead inefficiencies set in that cause average costs to rise as the already bloated production level increases even more. This situation is known as "diseconomies of scale;" graphically, it means that a firm is operating on the upward-sloping portion of its U-shaped long run average cost curve. (For an example of a long run cost curve, look at figure 9.4 in the textbook.) S&P analyst Dennis Milton, quoted in the Businessweek article, thinks that some fast-food companies are currently characterized by diseconomies of scale; this is his explanation for the proposed spin-off sales of Chipotle by McDonald's and of Tim Hortons by Wendy's International. Do you think that Milton is correct, or are there other possible explanations for the recent flurry of fast-food deals?

Keeping Phone Workers Plugged In

Monday, December 12, 2005
Businessweek.com
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Refer to Chapter 07

Optimal Combination of Inputs

As chapter 7 explains, an important measure of the value of a factor to a firm is the ratio of the marginal product of the factor to the cost per unit of the factor. This ratio can be thought of as a benefit/cost ratio, with the marginal product (which is the extra output produced by the factor) as the benefit gained by paying to employ a factor. For most firms, labor is the most important factor of production, and some firms have tried to increase labor's benefit/cost ratio by cutting wages and/or job benefits. But, as the Businessweek article suggests, there can be problems with a labor cost-cutting strategy. First, turnover is a very important cost of employing workers, since it is very expensive to recruit and train new workers; low wages can increase turnover. And second, there is often a negative feedback loop when employees' wages are cut--lower wages reduce work incentives and reduce the marginal product of labor. Indeed, the article quotes John Uprichard, president of a recruting company, as suggesting that firms who employ phone workers "pay a little above what the market is offering" and "build in financial incentives to productivity." Do you think that Uprichard's advice is wise? For what other occupations (besides phone workers) might Uprichard's advice be applicable?

Can GM Stop Blowing Cash?

Saturday, November 12, 2005
Businessweek.com
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Refer to Chapter 07

Minimization of cost

A requirement for maximum firm profits is "cost-minimization"--producing a given level of output at minimum possible cost. Given GM's problems with excess manufactuing capacity and excessive labor costs, as described in the Businessweek article, it is evident that GM is not producing its output in the cheapest possible manner. Quotations such as these from the article emphasize this point: "Union contracts thwart plant closings and all but prohibit firing of factory hands, who get paid at least 75% of their wages when furloughed....Right now, GM's 5,000 idled U.S. workers are costing (GM) $500 million a year in cash." Given intense price competition with rival automakers, GM's costs per vehicle exceed its revenues per vehicle--a recipe for disaster. We can illustrate GM's cost problems using an isoquant and a set of isocost curves, similar to figure 7.9 from the textbook. As you look at figure 7.9, do you think that GM is operating at point "S"? If not, then is it opearting at some point on isocost line C2? Which point?

Clorox: The Dirt on Innovation

Thursday, November 03, 2005
Businessweek.com
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Refer to Chapter 07

Innovation, Ideation

Too often managers view innovation as the purview of the technical inventor, such as the engineer who invents a new high-storage optical disc or a scientist involved in nanotechnology. But in this interview, Clorox vice-president Mary Jo Cook correctly describes innovation this way: "this idea of innovation as not just creating the product that will delight consumers -- it's creating it, commercializing it, the supply chain for it, the aftermarket management of it." She also describes the process of "ideation," a managed brainstorming procedure meant to best harness the new ideas of employees. As you read the interview along with content from chapter 7 (notably the section "What makes for Success?"), to what extent do you think that successful innovation techniques can be enabled by universal principles of effective management? Or is innovation still too unpredictable a process to be managed as a profit-center similar to other parts of a firm's operations?