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CA Intermediate · Financial Management and Strategic Management · Strategic Analysis: Internal Environment

Rohan Pharma's cost per unit has fallen steadily as cumulative output has grown, because workers have become more skilled through repetition and processes have been refined. A rival with half the cumulative volume has higher unit costs. Which concept best explains Rohan's cost advantage, and what strategic implication follows?

This is the experience curve effect, where unit costs fall as cumulative output grows through learning and process refinement. The strategic implication is to pursue market share early to move down the cost curve faster than rivals. It differs from economies of scale, which depend on the size of operations.

  1. AEconomies of scale; build the largest plant possible regardless of demand
  2. BExperience curve; pursue market share early to move down the cost curve fasterCorrect
  3. CEconomies of scope; diversify into unrelated products
  4. DCore competence; outsource all manufacturing

Explanation

Costs falling with cumulative output through learning is the experience curve effect, distinct from economies of scale, which relate to size of operation at a point in time. The implication is to gain volume and share early so as to reduce costs faster than rivals. Scope and outsourcing do not describe learning-based cost decline.

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