Ch06: Production

and Cost Analysis

in the Long Run
Group 7:
Fatimah, Atiqah, Shahirah
Case for Analysis: iPhone in China

The page discusses the decisions made by Apple Inc.

Additionally, the page mentions other manufacturing
regarding the manufacturing of iPhones and iPads in Furthermore, the page briefly mentions some
companies facing similar decisions, such as Standard
China. It highlights the reasons behind Apple's choice Canadian manufacturers and other companies
Motor Products in North Carolina, which
to outsource production, such as cheaper labor, moving their facilities to the United States due to
manufactures replacement auto parts and competes
large-scale foreign factories, and the skills of foreign more competitive wages, lower energy costs, and
with Chinese firms. It discusses the factors
workers. The passage also mentions the controversy increased productivity. Examples include Caterpillar,
influencing their decisions, such as technology
surrounding the working conditions at the Chinese Navistar International Corp., Electrolux, AB, and
requirements, quality assurance, skilled workers, and
factories, including excessive overtime, crowded Bridgestone Corp.
customer expectations.
dorms, and health and safety violations.
Summary of the case based on key points
Apple Inc. made the decision to manufacture iPhones and iPads overseas due to
cheaper labor, large-scale factories, and the skills of foreign workers.

Labor cost is a small component of total costs for high-technology companies; buying
parts and managing supply chains are more significant expenses.

Apple's quest for efficiency and cost-cutting has led to controversy over working
conditions at Chinese factories, with allegations of excessive overtime, crowded
dorms, health and safety violations, and environmental issues.

Other manufacturing companies, like Standard Motor Products in North Carolina, face
similar decisions based on product type, input costs, and customer expectations.

Some companies have moved their facilities from Canada to the United States due to
competitive wages, lower energy costs, and increased productivity. Examples include
Caterpillar, Navistar International Corp., Electrolux AB, and Bridgestone Corp.
Long run decision on Iphone by Steve Jobs
In the long run, Steve Jobs made a crucial decision for the iPhone that had a significant impact on
Apple's success. He focused on creating a closed ecosystem by tightly integrating hardware, software, and
services, which differentiated the iPhone from other smartphones in the market.

Jobs recognized the importance of simplicity and user experience, leading to the development of a user-
friendly interface and intuitive touch-based interactions. This emphasis on design and usability set the
iPhone apart and created a strong brand identity.

Furthermore, Jobs prioritized the development of a robust App Store, allowing third-party developers to
create applications for the iPhone. This decision opened up endless possibilities for users and contributed to
the rapid growth and popularity of the iPhone.

By taking a long-term perspective, Jobs ensured that the iPhone became more than just a device; it became
a platform that revolutionized the mobile industry. This strategic vision and commitment to innovation
helped Apple establish itself as a leader in the smartphone market and build a loyal customer base.
Key Takeaways
Cost considerations play a significant role in manufacturing decisions, with companies like Apple Inc. opting to outsource
production to countries with cheaper labor and larger-scale factories.

Labor cost is just one component of total costs for high-technology companies, with expenses related to parts procurement and
supply chain management being equally important. Controversies can arise when companies prioritize cost-cutting measures, as

Controversies can arise when companies prioritize cost-cutting measures, as seen in the case of Apple, where allegations of
poor working conditions and environmental violations were raised.

The competition for manufacturing facilities between countries can be influenced by factors like wages, energy costs, and
productivity, leading companies to relocate their operations to more favorable locations.

The decisions made by these companies have broader implications for employment and economic growth in different regions
and countries.
Input Substitution
• Input substitution is the degree to which a firm can substitute one input for another in a production process.
• Long-run production function shows the relationship between a flow of inputs and the resulting flow of
output, where all inputs are variable.
Q = f (L, K)
Q = quantity of output
L = quantity of labor input (variable)
K = quantity of capital input (variable)
• Labor-intensive method of production uses large amounts of labor relative to the other inputs to produce the
firm’s output.
• Capital-intensive method of production uses large amounts of capital equipment relative to the other inputs to
produce the firm’s output.

• A manager’s choice of inputs will be influenced by:

 Technology of production process
 Prices of inputs of production
 Set of incentives facing the given producer
Input Substitution
Technology of production process
• The article demonstrated the diverse ways in which industries are substituting inputs with technology to
improve efficiency, reduce costs, and enhance productivity.

Automobile industry Fast-food industry RFID in airline industry Railroad industry

Shifted from labor- Utilizes capital-intensive Bar code–printed tags were Plastic railroad ties made
intensive to capital- assembly lines with replaced with RFID baggage from recycled materials
intensive processes conveyer belts and tags to reduce lost luggage. are being considered as
leading to significant ovens, showcasing the The adoption was initially a substitute for traditional
reduction in production adoption of high-tech limited by cost but became wooden ties due to their
time. production methods. more feasible as RFID tag durability, despite being
prices decreased. more expensive.
Input Substitution
Prices of inputs of production
• Input prices influences the degree or feasibility of input substitution in production processes.
• Companies reduce production costs by replacing costly inputs with more affordable alternatives.

Impact of energy cost Technological innovation Mechanization in agriculture Industry development

Rising costs of gas, oil, Law firms use software for Machinery replacing manual Supermarkets in U.S. are
electricity and high energy electronic discovery labor in industries like fresh land-intensive, dependent
taxes influence managerial processes, replacing fruit harvesting. Canopy on large plots of land at
decisions. Intel Corp., higher-priced lawyers and shakers in Florida citrus low prices, while Germany
responded through designing paralegals. Linguistic industry significantly increase has smaller supermarkets
less energy-intensive factory discovery technologies and efficiency compared to with increased productivity
equipment. Arla Foods sociological approaches manual picking. due to bulk purchases and
reduced energy through are employed to find and a limited variety of goods.
various projects. sort relevant documents.
Input Substitution
Set of incentives facing the given producer
• Encompasses various motivations, with cost minimization, profit maximization, competition, supply chain
efficiency, consumer demand, and regulatory compliance being key drivers.
1) Cost minimization incentives and profit maximization – by opting for more economical input to enhance profit margins
(e.g reducing bag usage in grocery industry and searching for less expensive suppliers for plane parts.)
2) Market competition – input substitution are likely in competitive market environments where firms aim to maximize profits
or operate under challenging business (e.g adoption of machinery in fresh-fruits industry in response to global competition.
3) Market power and X-inefficiency – firms with market power have fewer incentives to constantly search for cost-
minimizing input combinations, leading to concept of X-inefficiency.
4) Labor issues – cost-cutting such as lean production may face resistance from workers and unions. However, attitude of auto
workers in U.S have shifted in response to industry challenges.
5) Supply chain risks – while lean production and streamlined supply chains can improve efficiency, they may be vulnerable to
disruption (e.g earthquake and tsunami in Japan)
6) Nonprofit organizations – not driven by strict profit-maximization constraint, hence may have fewer incentives to minimize
production costs.
7) Political and legislative influences - impact input combination (e.g California mandated fixed nurse-to-patient ratios in
hospitals due to concerns on healthcare quality amid cost-cutting efforts.
 What

Economies of Scale vs Diseconomies of Scale

Production Cost Decreases Production Cost Increases

Economies of scale refer to when the average Diseconomies of scale occur when the average cost
cost per unit decreases, as the scale of per unit increases, as the scale of production
production increases. increases.
 When

Economies of Scale vs Diseconomies of Scale

At Initial Expansion Phase

Observed in the initial phases of
production expansion. As production
increases, average costs decline.

At Growth Phase
Economies of Scale vs Diseconomies of Scale
Tend to set in at a certain point after a business has
achieved a certain size. Beyond this point, further
increases in production may lead to rising average
costs.
 Why
Economies of Scale vs Diseconomies of Scale
Stemming from positive factors
- bulk purchasing discounts
- improved efficiency in production
(technological & automation)
- increased specialization
- spread advertising cost
Bulk purchase Airbus aircraft = better
negotiated proposal
Implement New Skies system = better
productivity rate
Specialized but also versatile workforce =
well-coordinated, multitasking Allstars
Inflicted by negative factors
- increased complexity in operations
- inefficiencies in large, bureaucratic organization
- more difficult to coordinate, control and
communicate to a larger set of activities and
workforce
Disoriented pricing & revenue management, sales and
distribution, brand presence in foreign markets and
alliance base
2014 crisis, supported by Khazanah = more scrutinization, more layered approvals =
red tape, slower decision-making​
​
More crew scheduling, ground services, and maintenance for a larger number of
flights and destinations becomes more challenging. This leads to delays, disruptions.
Less OTP = additional costs
 Effects

Economies of Scale vs Diseconomies of Scale

Leading to profitability & Leading to loss-making

competitiveness & structural issues

Due to the ability to produce goods or Due to the higher average costs per unit of
services more efficiently and at a lower production and reduced profitability, firms will
average cost. reevaluate their size and organizational structure.

Increased market share, higher profits, and Decentralization, restructuring, or other measures to
competitive advantages. address the challenges associated with increased
scale.