Classroom Companion: Business

8.2 · Value Chain

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106
8
MC =
+ + >
m
p
s
0.
This is the lowest achievable cost per item. Note that this is different from digital 
services in which the marginal cost can be zero (MC = 0) as explained in 
7
Chap. 
6
. This emphasizes the difference between the industrial economy (non-zero mar-
ginal cost) and the digital economy (zero marginal cost).
Reducing the cost of raw materials can be done by bargaining for lower prices 
and utilizing the raw materials better. One example is to increase the yield when 
producing large semiconductor wafers, thus making each wafer cheaper. However, 
the cost of producing large silicon crystals with few defects is expensive so that 
there is a balance between the optimum purity of the crystals and yield. A second 
example is to develop mechanical structures requiring less material for the same 
structural strength. The cooling towers of nuclear plants are shaped such that they 
require less concrete than a cylinder with the same cooling capacity—their shape 
just makes the towers cheaper and has nothing to do with the physical or chemical 
processes of the reactor. A third example is to replace existing raw material with 
new material that is more easily available. This requires research into new materials, 
for example, to produce semiconductors that are more heat-resistant or to find 
materials that can replace indium in touchscreens.
The cost of production is reduced by, for example, inventing new production 
methods that are faster and more power effective, require less manpower (e.g., 
using robots instead of people), or reduce waste. Maintenance and renewal of 
machines are also important factors. Sometimes, better algorithms will do the 
trick. A German company producing printed cards for the electronics industry 
developed an algorithm for finding the shortest path (also called the “travelling 
salesman problem”) for the movements of the robot drilling the holes into the card, 
thereby reducing the time it took to produce a single card (and hence, reducing the 
price per card).
Out-logistics costs may be reduced, for example, by just-in-time production, 
whereby storage requirements and the need for binding capital over a long period 
are reduced.