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Evaluating Business Strategies in High-Investment Industries
Imagine a company enters the market for producing a new type of advanced computer chip. The initial investment in designing the chip and setting up the manufacturing facility is extremely high. However, once the facility is operational, the cost of producing each individual chip is very low and does not change significantly with the number of chips produced. The company is considering two primary strategies:
Strategy A: Target a small, specialized niche market, selling a low volume of chips at a very high price. Strategy B: Target the mass market, aiming to sell a very high volume of chips at a much lower price.
Evaluate these two strategies. Which one is more likely to lead to a lower cost per chip for the company in the long run? Justify your recommendation by explaining the relationship between the quantity of chips produced and the average cost of producing each chip in this scenario.
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