Question

Samsung is hiring you as a consultant to evaluate different strategies to expand capacity in the U.S., explain the concepts of economies of scale, best-operating levels, and capacity cushions. What would your recommendation to Samsung be?  

Answer 1

Answer: Economies of scale: The economies of scale refer to the cost advantages that the large companies can leverage because of their large scale of operations. Large companies can lower their cost of operations as cost per unit of output decreases with the increasing scale of production. The companies not only gain cost advantages from the lowering of cost per unit during production but also through getting raw materials at lower price due to the large scale of purchase they make from the suppliers which gives them a power to squeeze more margins from suppliers.

Best operating level: In this strategy, the firms attempt to optimize the utilization of its capacity. For this purpose it is essential to have economies of scale and produce more products for reducing the average per unit cost of production. Thus if this level is obtained the average per unit cost of production is minimized.

Capacity cushion: in this strategy, the firms create a reserve capacity of production so that in case of unexpected demand or because of a sudden breakdown in the production capacity, the demand does not get affected.

  I feel that the company needs to focus on economies of scale and best operating level. The U.S market is highly competitive and if the company is able to provide high quality products at cheaper prices it will attain a competitive advantage.