Economies of scale and economies of scope

This note is primarily directed to students. It is the third in a series on strategic cost analysis. Economies of scope is a term related to economies of scale. I will argue that economies of scope is not a very helpful concept in strategic management.

Apologies, but this note is not very structured :)

Economies of scale and capacity utilisation (economies of capacity)

This note is primarily directed to students. It is the second in a series on strategic cost analysis. Economies of scale is defined as a company's cost per unit being lower when the it produces at a larger volume. This note explains the difference between economies of scale and a related concept called capacity utilisation. Capacity utilisation refers to how much of the existing capacity is used for production.

Economies of scale

This note is primarily directed to students. It is the first in a series on strategic cost analysis. One of the most important cost drivers is economies of scale . A key point to note is that diseconomies of scale, which textbook authors like to describe, hardly exist in the real world.

How to pick a good management book

A Business Week article last year mentioned that 11,000 management books are published each year (here). I can't believe this number, but even 1,100 books per year would be a lot. Thinking about it, even 110 books are too many too read. Actually, 11 business books are probably also too many to read in a year. So should you even bother reading management books? Nassim Taleb (on his third book, see below) concludes "I don't read business books and I almost never talk to anyone who reads them". In fact, this sentiment is common even among many managers. Personally, I think a good target for most of us is to read one to three business books per year. With such a limited target you need to do quite a bit of research before you decide what to read. Your time is valuable.

Naive shareholders taken for a ride?

A few recent corporate governance transactions are worrying. Is this evidence of a new variant of the old principal/agent conflict? This conflict occurs when the CEO (agent) and the owners (principal) of the company have different interests? Here are two recent examples:

• Dell. Michael Dell CEO of Dell drives the share price of Dell down by poor management. Then he makes a bid for the whole company together with a private equity consortium. Michael Dell will remain as CEO and now he will be able to turn around the company that he was not able to turn around in the preceding years. Comment: If Mr Dell will be so good at fixing Dell, why couldn't he fix the company when he was CEO? His claim that the stock market would not allow him to take the necessary actions is just not credible
• Nokia. Stephen Elop CEO of Nokia and a former high level executive at Microsoft stops development of Nokia's Symbian operating system and focuses on the Windows Phone. Before Nokia has staged a turnaround, he negotiates a sale of Nokia's mobile phone division to Microsoft. Microsoft gets the mobile phone division cheaply and Elop moves back to Microsoft. Comment: Nokia and Microsoft are in the same boat and both need the Windows smartphone to be a success. Why would Mr Elop sell the mobile phone business to Microsoft before the Nokia turnaround is complete? It is true that Nokia is dependent on Microsoft, but the reverse is equally true. Why is it good for Nokia's shareholders that Mr Elop completes the turnaround after being hired by Microsoft?

Book review: "Ten types of innovation"

The consulting group Doblin in Chicago has published a book on the innovation process in companies. Their main point is that each real life innovation should utilise three to five out of a total of ten ideal types of innovation. This will maximise the chances of commercial success. Here are the ten types:

Microsoft's future

In an earlier positing (here), I described how Microsoft's now outgoing CEO Steve Ballmer talked about Microsoft being a consumer company, despite having only around 15% of sales to consumers. Windows is mostly bought by OEMs (original equipment manufacturers) and Office by corporations. Since Microsoft is invoicing corporations and not consumers, it is a business-to-business company whatever the CEO is saying. Very few consumers make an active choice to buy Windows or Office. Consumers actively buy Playstation and Skype services but those products are a small portion of Microsoft's revenues.