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# Manufacturers have to do more than build large manufacturing

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Manufacturers have to do more than build large manufacturing [#permalink]

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29 May 2012, 11:37
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The Official Guide for GMAT Review, 13th Edition, 2012

Practice Question
Question No.: RC 37 ~ 41
Page: 382

Manufacturers have to do more than build large manufacturing plants to realize economies of scale. It is true that as the capacity of a manufacturing operation rises, costs per unit of output fall as plant size approaches “minimum efficient scale,” where the cost per unit of output reaches a minimum, determined roughly by the state of existing technology and size of the potential market. However, minimum efficient scale cannot be fully realized unless a steady “throughput” (the flow of materials through a plant) is attained. The throughput needed to maintain the optimal scale of production requires careful coordination not only of the flow of goods through the production process, but also of the flow of input from suppliers and the flow of output to wholesalers and final consumers. If throughput falls below a critical point, unit costs rise sharply and profits disappear. A manufacturer’s fixed costs and “sunk costs” (original capital investment in the physical plant) do not decrease when production declines due to inadequate supplies of raw materials, problems on the factory floor, or inefficient sales networks. Consequently, potential economies of scale are based on the physical and engineering characteristics of the production facilities—that is, on tangible capital—but realized economies of scale are operational and organizational, and depend on knowledge, skills, experience, and teamwork—that is, on organized human capabilities, or intangible capital.

The importance of investing in intangible capital becomes obvious when one looks at what happens in new capital-intensive manufacturing industries. Such industries are quickly dominated, not by the first firms to acquire technologically sophisticated plants of theoretically optimal size, but rather by the first to exploit the full potential of such plants. Once some firms achieve this, a market becomes extremely hard to enter. Challengers must construct comparable plants and do so after the first movers have already worked out problems with suppliers or with new production processes. Challengers must create distribution networks and marketing systems in markets where first movers have all the contacts and know-how. And challengers must recruit management teams to compete with those that have already mastered these functional and strategic activities.
1. The passage suggests that in order for a manufacturer in a capital-intensive industry to have a decisive advantage over competitors making similar products, the manufacturer must

A. be the first in the industry to build production facilities of theoretically optimal size
B. make every effort to keep fixed and sunk costs as low as possible
C. be one of the first to operate its manufacturing plants at minimum efficient scale
D. produce goods of higher quality than those produced by direct competitors
E. stockpile raw materials at production sites in order to ensure a steady flow of such materials

[Reveal] Spoiler:
C

2. The passage suggests that which of the following is true of a manufacturer's fixed and sunk costs?

A. The extent to which they are determined by market conditions for the goods being manufactured is frequently underestimated.
B. If they are kept as low as possible, the manufacturer is very likely to realize significant profits.
C. They are the primary factor that determines whether a manufacturer will realize economies of scale.
D. They should be on a par with the fixed and sunk costs of the manufacturer’s competitors.
E. They are not affected by fluctuations in a manufacturing plant’s throughput.

[Reveal] Spoiler:
E

3. In the context of the passage as a whole, the second paragraph serves primarily to

A. provide an example to support the argument presented in the first paragraph
B. evaluate various strategies discussed in the first paragraph
C. introduce evidence that undermines the argument presented in the first paragraph
D. anticipate possible objections to the argument presented in the first paragraph
E. demonstrate the potential dangers of a commonly used strategy

[Reveal] Spoiler:
A

4. The passage LEAST supports the inference that a manufacturer's throughput could be adversely affected by

A. a mistake in judgment regarding the selection of a wholesaler
B. a breakdown in the factory's machinery
C. a labor dispute on the factory floor
D. an increase in the cost per unit of output
E. a drop in the efficiency of the sales network

[Reveal] Spoiler:
D

5. The primary purpose of the passage is to

A. point out the importance of intangible capital for realizing economies of scale in manufacturing
B. show that manufacturers frequently gain a competitive advantage from investment in large manufacturing facilities
C. argue that large manufacturing facilities often fail because of inadequate investment in both tangible and intangible capital
D. suggest that most new industries are likely to be dominated by firms that build large manufacturing plants early
E. explain why large manufacturing plants usually do not help manufacturers achieve economies of scale

[Reveal] Spoiler:
A

[Reveal] Spoiler: Question #1 OA
[Reveal] Spoiler: Question #2 OA
[Reveal] Spoiler: Question #3 OA
[Reveal] Spoiler: Question #4 OA
[Reveal] Spoiler: Question #5 OA

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Re: Manufacturers have to do more than build large manufacturing [#permalink]

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20 Aug 2012, 14:57
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Re: Manufacturers have to do more than build large manufacturing [#permalink]

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01 Apr 2013, 21:15
Can any one pls explain me 1st and 5th questions below?
1. The passage suggests that in order for a manufacturer in a capital-intensive industry to have a decisive advantage over competitors making similar products, the manufacturer must
A. be the first in the industry to build production facilities of theoretically optimal size
B. make every effort to keep fixed and sunk costs as low as possible
C. be one of the first to operate its manufacturing plants at minimum efficient scale
D. produce goods of higher quality than those produced by direct competitors
E. stockpile raw materials at production sites in order to ensure a steady flow of such materials

Here a, b, d gets directly eliminated. I am confused between a and e.

5. The primary purpose of the passage is to
A. point out the importance of intangible capital for realizing economies of scale in manufacturing
B. show that manufacturers frequently gain a competitive advantage from investment in large manufacturing facilities
C. argue that large manufacturing facilities often fail because of inadequate investment in both tangible and intangible capital
D. suggest that most new industries are likely to be dominated by firms that build large manufacturing plants early
E. explain why large manufacturing plants usually do not help manufacturers achieve economies of scale

5th Qn - I am confused between a and e
a - talks about intangible capital importance. Last line of 1st parra says, for potential economies of scale, investment in tangible capital needed and for realized economies of scale, investment in intagible capital needed. So , a becomes part of primary purpose. Pls correct me if i am wrong here.
e - 1st line of 1st para says, manufacturer needs to do more than constructing large sized plants to acheive economies of scale. So, large plans need not necessarily acheive economies of scale. So, why can't e be agreed to?

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Re: Manufacturers have to do more than build large manufacturing [#permalink]

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26 May 2013, 09:48
1
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ernesto wrote:
Can any one pls explain me 1st and 5th questions below?
1. The passage suggests that in order for a manufacturer in a capital-intensive industry to have a decisive advantage over competitors making similar products, the manufacturer must
A. be the first in the industry to build production facilities of theoretically optimal size
B. make every effort to keep fixed and sunk costs as low as possible
C. be one of the first to operate its manufacturing plants at minimum efficient scale
D. produce goods of higher quality than those produced by direct competitors
E. stockpile raw materials at production sites in order to ensure a steady flow of such materials

Here a, b, d gets directly eliminated. I am confused between a and e.

5. The primary purpose of the passage is to
A. point out the importance of intangible capital for realizing economies of scale in manufacturing
B. show that manufacturers frequently gain a competitive advantage from investment in large manufacturing facilities
C. argue that large manufacturing facilities often fail because of inadequate investment in both tangible and intangible capital
D. suggest that most new industries are likely to be dominated by firms that build large manufacturing plants early
E. explain why large manufacturing plants usually do not help manufacturers achieve economies of scale

5th Qn - I am confused between a and e
a - talks about intangible capital importance. Last line of 1st parra says, for potential economies of scale, investment in tangible capital needed and for realized economies of scale, investment in intagible capital needed. So , a becomes part of primary purpose. Pls correct me if i am wrong here.
e - 1st line of 1st para says, manufacturer needs to do more than constructing large sized plants to acheive economies of scale. So, large plans need not necessarily acheive economies of scale. So, why can't e be agreed to?

The main idea of passage is "minimum efficient scale", which is connected to intangible capital in 1st paragraph. In the 2nd paragraph. Told you that you will dominate the industries if you achieved that scale. Competitor must do more to compete with you. (A) properly stated the main idea.

(E), passage does not discussed the reason why manufacturers not achieve their scale. Thus incorrect.

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Re: Manufacturers have to do more than build large manufacturing [#permalink]

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26 Oct 2014, 09:28
Can somebody in GMATCLUB tell me how to set timer for RC passage of OG 13th?
How can I transfer my RC answers to my workbook to record my performance?
Thank you.

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Re: Manufacturers have to do more than build large manufacturing [#permalink]

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23 Jan 2015, 06:30
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I am confused with 4th Question. Doesn't author mention in lines 15 through 19 that the throughput actually depends on the increase in the cost per unit of the output. I crossed of D for this reason.

Is it because the statement in option D is more like "cause effect" --> throughput decline causes the cost per unit increase and not viceversa?

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Re: Manufacturers have to do more than build large manufacturing [#permalink]

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28 Aug 2015, 00:17
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Could some one explain how Q3 is A.
How to identify if the last paragraph contains an example when example term is not explicitly mentioned?

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Re: Manufacturers have to do more than build large manufacturing [#permalink]

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25 Nov 2015, 11:31
1
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Paragraph - 1 : Manufac have to concentrate more than building plants & machinery

Paragraph - 2 : Minimum efficient scale requires not only on technology but throughput ( sale/production of goods ) but on the intangible capital. Discusses problems associated with inflow and out flow of goods / raw materials. Introduces definitions of -

Potential economies of scale ( tangible )= Based on the physical and engineering characteristics
Realized economies of scale ( intangible )= Human skills

Paragraph - 3 : Stresses the importances & Challenge of intanglible capital to attain economies of scale.

1. The passage suggests that in order for a manufacturer in a capital-intensive industry to have a decisive advantage over competitors making similar products, the manufacturer must -

Answer is option (C) - Clearly follows from the second paragraph

2. The passage suggests that which of the following is true of a manufacturer's fixed and sunk costs?

Answer is option (E) - Clearly follows from the second paragraph

Quote:
A manufacturer’s fixed costs and “sunk costs” (original capital investment in the physical plant) do not decrease when production declines due to inadequate supplies of raw materials, problems on the factory floor, or inefficient sales networks.

3. In the context of the passage as a whole, the second paragraph serves primarily to

Answer is option (A) - Clearly follows from the second paragraph

The second paragraph extends the claim made by the author in the first paragraph

4. The passage LEAST supports the inference that a manufacturer's throughput could be adversely affected by

What is throughput -
Quote:
However, minimum efficient scale cannot be fully realized unless a steady “throughput” (the flow of materials through a plant) is attained. The throughput needed to maintain the optimal scale of production requires careful coordination not only of the flow of goods through the production process, but also of the flow of input from suppliers and the flow of output to wholesalers and final consumers.

Our must be something which is not related to input/output of goods /raw materials.

So, option D is our answer.

5. The primary purpose of the passage is to

Answer is undoubtedly (A) { Summarizing all the paragraphs }
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Re: Manufacturers have to do more than build large manufacturing [#permalink]

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26 Apr 2017, 07:10
3
KUDOS
omidsa wrote:
Manufacturers have to do more than build large manufacturing plants to realize economies of scale. It is true that as the capacity of a manufacturing operation rises, costs per unit of output fall as plant size approaches “minimum efficient scale,” where the cost per unit of output reaches a minimum, determined roughly by the state of existing technology and size of the potential market. However, minimum efficient scale cannot be fully realized unless a steady “throughput” (the flow of materials through a plant) is attained. The throughput needed to maintain the optimal scale of production requires careful coordination not only of the flow of goods through the production process, but also of the flow of input from suppliers and the flow of output to wholesalers and final consumers. If throughput falls below a critical point, unit costs rise sharply and profits disappear. A manufacturer’s fixed costs and “sunk costs” (original capital investment in the physical plant) do not decrease when production declines due to inadequate supplies of raw materials, problems on the factory floor, or inefficient sales networks. Consequently, potential economies of scale are based on the physical and engineering characteristics of the production facilities—that is, on tangible capital—but realized economies of scale are operational and organizational, and depend on knowledge, skills, experience, and teamwork—that is, on organized human capabilities, or intangible capital.

The importance of investing in intangible capital becomes obvious when one looks at what happens in new capital-intensive manufacturing industries. Such industries are quickly dominated, not by the first firms to acquire technologically sophisticated plants of theoretically optimal size, but rather by the first to exploit the full potential of such plants. Once some firms achieve this, a market becomes extremely hard to enter. Challengers must construct comparable plants and do so after the first movers have already worked out problems with suppliers or with new production processes. Challengers must create distribution networks and marketing systems in markets where first movers have all the contacts and know-how. And challengers must recruit management teams to compete with those that have already mastered these functional and strategic activities.
1. The passage suggests that in order for a manufacturer in a capital-intensive industry to have a decisive advantage over competitors making similar products, the manufacturer must

A. be the first in the industry to build production facilities of theoretically optimal size
B. make every effort to keep fixed and sunk costs as low as possible
C. be one of the first to operate its manufacturing plants at minimum efficient scale
D. produce goods of higher quality than those produced by direct competitors
E. stockpile raw materials at production sites in order to ensure a steady flow of such materials

[Reveal] Spoiler:
C

OG2017 RC449-453 P 390

Passage: Economies of Scale

The Simple Story

Manufacturers do have to build big plants (tangible capital) to achieve economies of scale, but doing so isn’t enough. The intangible capital (knowledge, experience, etc.) is at least as important. In fact, mastering the intangibles can lead to such great economies of scale that the company develops a market-dominant position, making it very hard for other competitors to join the market.

Sample Passage Map

Here is one way to map this passage. (Note: abbreviate as desired!)

P1. Econ of scale: Yes, need large plants. Also need good throughput.
Tangible (facilities) vs. Intangible (know-how, experience)

P2. Invest in Int.: important
1st to master Int. = dominate

Step 1: Identify the Question

The word suggests in the question stem indicates that this is an Inference question. Specifically, what can you infer regarding what a manufacturer must do in order to gain a decisive advantage?

Step 2: Find the Support

Overall, the correct question should go along with the main idea that it is important to invest in intangible capital, not just tangible capital (in which everyone already invests).

Where does the author talk about competitive advantage? Primarily in paragraph two:

“Such industries are quickly dominated, not by the first firms to acquire technologically sophisticated plants of theoretically optimal size, but rather by the first to exploit the full potential of such plants. Once some firms achieve this, a market becomes extremely hard to enter.”

It isn’t necessary to be the first to build a plant, but it is important to be one of the first to maximize the full potential of a plant. What is the full potential? It has to do with maximizing economies of scale. From paragraph one:

“ … costs per unit of output fall as plant size approaches “minimum efficient scale,” where the cost per unit of output reaches a minimum, determined roughly by the state of existing technology and size of the potential market.”

It’s crucial, then, to be among the first to figure out how to achieve economies of scale (aka, minimum efficient scale). If so, then you may be able to dominate the market.

Step 4: Eliminate and Find a Match

(A) This choice may be tempting because it copies language from the passage exactly, but the underlying message contradicts the passage. The important thing is not necessarily to be the first to build up that plant; rather, it’s important to be among the first to achieve economies of scale.
(B) The first paragraph does mention fixed and sunk costs, but does not do so in the context of competitive advantage in particular.
(C) CORRECT. This choice matches the predicted answer: the first company or companies to achieve economies of scale can dominate the market.
(D) This choice sounds great in the real world (quality must be important, right?) but the passage does not address quality as a factor in gaining competitive advantage.
(E) The first paragraph does discuss the importance of ensuring a steady flow of raw materials, but does not do so in the context of competitive advantage in particular. (And note that a steady flow is not the same thing as stockpiling.)
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Re: Manufacturers have to do more than build large manufacturing [#permalink]

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26 Apr 2017, 08:06
1
KUDOS
omidsa wrote:
Manufacturers have to do more than build large manufacturing plants to realize economies of scale. It is true that as the capacity of a manufacturing operation rises, costs per unit of output fall as plant size approaches “minimum efficient scale,” where the cost per unit of output reaches a minimum, determined roughly by the state of existing technology and size of the potential market. However, minimum efficient scale cannot be fully realized unless a steady “throughput” (the flow of materials through a plant) is attained. The throughput needed to maintain the optimal scale of production requires careful coordination not only of the flow of goods through the production process, but also of the flow of input from suppliers and the flow of output to wholesalers and final consumers. If throughput falls below a critical point, unit costs rise sharply and profits disappear. A manufacturer’s fixed costs and “sunk costs” (original capital investment in the physical plant) do not decrease when production declines due to inadequate supplies of raw materials, problems on the factory floor, or inefficient sales networks. Consequently, potential economies of scale are based on the physical and engineering characteristics of the production facilities—that is, on tangible capital—but realized economies of scale are operational and organizational, and depend on knowledge, skills, experience, and teamwork—that is, on organized human capabilities, or intangible capital.

The importance of investing in intangible capital becomes obvious when one looks at what happens in new capital-intensive manufacturing industries. Such industries are quickly dominated, not by the first firms to acquire technologically sophisticated plants of theoretically optimal size, but rather by the first to exploit the full potential of such plants. Once some firms achieve this, a market becomes extremely hard to enter. Challengers must construct comparable plants and do so after the first movers have already worked out problems with suppliers or with new production processes. Challengers must create distribution networks and marketing systems in markets where first movers have all the contacts and know-how. And challengers must recruit management teams to compete with those that have already mastered these functional and strategic activities.
2. The passage suggests that which of the following is true of a manufacturer's fixed and sunk costs?

A. The extent to which they are determined by market conditions for the goods being manufactured is frequently underestimated.
B. If they are kept as low as possible, the manufacturer is very likely to realize significant profits.
C. They are the primary factor that determines whether a manufacturer will realize economies of scale.
D. They should be on a par with the fixed and sunk costs of the manufacturer’s competitors.
E. They are not affected by fluctuations in a manufacturing plant’s throughput.

[Reveal] Spoiler:
E

OG2017 RC449-453 P 390

Passage: Economies of Scale
Question: Infer Costs

The Simple Story

Manufacturers do have to build big plants (tangible capital) to achieve economies of scale, but doing so isn’t enough. The intangible capital (knowledge, experience, etc.) is at least as important. In fact, mastering the intangibles can lead to such great economies of scale that the company develops a market-dominant position, making it very hard for other competitors to join the market.

Sample Passage Map

Here is one way to map this passage. (Note: abbreviate as desired!)

P1. Econ of scale: Yes, need large plants. Also need good throughput.
Tangible (facilities) vs. Intangible (know-how, experience)

P2. Invest in Int.: important
1st to master Int. = dominate

Step 1: Identify the Question

The word suggests in the question stem indicate that this is an Inference question. Specifically, what can you infer regarding a manufacturer’s fixed and sunk costs?

Step 2: Find the Support

Fixed and sunk costs were mentioned in paragraph one. In general, when you can find a precise keyword mentioned just once in the passage, start re-reading the sentence before the one in which the keyword appears.

“If throughput falls below a critical point, unit costs rise sharply and profits disappear. A manufacturer’s fixed costs and “sunk costs” (original capital investment in the physical plant) do not decrease when production declines due to inadequate supplies of raw materials, problems on the factory floor, or inefficient sales networks.”

What does that mean? These costs do not decrease even if you have to slow down the assembly line for some reason. That is, you’ve already spent some money to build your plant, and certain other costs are fixed, no matter how much you produce. These fixed and sunk costs are not affected by increases or decreases in actual production.

Step 4: Eliminate and Find a Match

(A) This choice is confusing.  The passage does not address how fixed and sunk costs may be determined by market conditions, however.
(B) This seems like a great real-world answer, but the passage does not claim that low costs of a certain type are very likely to lead to large profits.
(C) The passage does not say that these types of costs in particular are the primary factor responsible for achieving economies of scale. If anything, the passage implies that intangible factors are more important.
(D) While this choice sounds reasonable in the real world, competition is not mentioned in the context of fixed and sunk costs.
(E) CORRECT. This choice matches the predicted answer: a decrease in throughput (aka, production) doesn’t affect fixed and sunk costs. That money either has already been spent or cannot be reduced (for instance, the salaries of senior management!).
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Re: Manufacturers have to do more than build large manufacturing [#permalink]

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26 Apr 2017, 18:50
1
KUDOS
omidsa wrote:
Manufacturers have to do more than build large manufacturing plants to realize economies of scale. It is true that as the capacity of a manufacturing operation rises, costs per unit of output fall as plant size approaches “minimum efficient scale,” where the cost per unit of output reaches a minimum, determined roughly by the state of existing technology and size of the potential market. However, minimum efficient scale cannot be fully realized unless a steady “throughput” (the flow of materials through a plant) is attained. The throughput needed to maintain the optimal scale of production requires careful coordination not only of the flow of goods through the production process, but also of the flow of input from suppliers and the flow of output to wholesalers and final consumers. If throughput falls below a critical point, unit costs rise sharply and profits disappear. A manufacturer’s fixed costs and “sunk costs” (original capital investment in the physical plant) do not decrease when production declines due to inadequate supplies of raw materials, problems on the factory floor, or inefficient sales networks. Consequently, potential economies of scale are based on the physical and engineering characteristics of the production facilities—that is, on tangible capital—but realized economies of scale are operational and organizational, and depend on knowledge, skills, experience, and teamwork—that is, on organized human capabilities, or intangible capital.

The importance of investing in intangible capital becomes obvious when one looks at what happens in new capital-intensive manufacturing industries. Such industries are quickly dominated, not by the first firms to acquire technologically sophisticated plants of theoretically optimal size, but rather by the first to exploit the full potential of such plants. Once some firms achieve this, a market becomes extremely hard to enter. Challengers must construct comparable plants and do so after the first movers have already worked out problems with suppliers or with new production processes. Challengers must create distribution networks and marketing systems in markets where first movers have all the contacts and know-how. And challengers must recruit management teams to compete with those that have already mastered these functional and strategic activities.
3. In the context of the passage as a whole, the second paragraph serves primarily to

A. provide an example to support the argument presented in the first paragraph
B. evaluate various strategies discussed in the first paragraph
C. introduce evidence that undermines the argument presented in the first paragraph
D. anticipate possible objections to the argument presented in the first paragraph
E. demonstrate the potential dangers of a commonly used strategy

[Reveal] Spoiler:
A

OG2017 RC449-453 P 390

Passage: Economies of Scale
Question: Second Paragraph

The Simple Story

Manufacturers do have to build big plants (tangible capital) to achieve economies of scale, but doing so isn’t enough. The intangible capital (knowledge, experience, etc.) is at least as important. In fact, mastering the intangibles can lead to such great economies of scale that the company develops a market-dominant position, making it very hard for other competitors to join the market.

Sample Passage Map

Here is one way to map this passage. (Note: abbreviate as desired!)

P1. Econ of scale: Yes, need large plants. Also need good throughput.
Tangible (facilities) vs. Intangible (know-how, experience)

P2. Invest in Int.: important
1st to master Int. = dominate

Step 1: Identify the Question

The words second paragraph serves primarily to in the question stem indicate that this is a Paragraph question. What purpose does paragraph 2 serve in the context of the entire passage.

Step 2: Find the Support

On Paragraph questions, your task is two-fold: articulate the main idea or purpose of the specific paragraph and compare that to the overall main idea of the entire passage. Often, the first sentence of two of the specific paragraph will tell you the purpose of that paragraph in the context of the whole passage.

The opening sentence of the second paragraph is as follows:

The importance of investing in intangible capital becomes obvious when one looks at what happens in new capital‐intensive manufacturing industries.”

The entire passage is about the idea that intangible capital—not just tangible—is an important part of achieving economies of scale in manufacturing businesses.
The first sentence of the second paragraph indicates that the author has already established (in the previous paragraph) that it is important to invest in intangible capital. Now, in paragraph two, the author is going to provide a particular example that will serve to back up her claim.

Step 4: Eliminate and Find a Match

(A) CORRECT. This matches the predicted answer exactly.
(B) The second paragraph provides a specific example of the overall phenomenon; it does not evaluate various strategies presented earlier.
(C) This choice contradicts the passage. The second paragraph supports the first paragraph.
(D) This choice does not go along with the passage. The second paragraph provides an example in support of the first paragraph; it does not address possible objections.
(E) While the second paragraph does mention a danger for companies entering an already-established market with dominant players in place, this is not the main purpose of the paragraph. Rather, the focus of the paragraph is on the advantages that can be gained if a company does invest in intangible capital.
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Re: Manufacturers have to do more than build large manufacturing [#permalink]

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27 Apr 2017, 06:33
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omidsa wrote:
Manufacturers have to do more than build large manufacturing plants to realize economies of scale. It is true that as the capacity of a manufacturing operation rises, costs per unit of output fall as plant size approaches “minimum efficient scale,” where the cost per unit of output reaches a minimum, determined roughly by the state of existing technology and size of the potential market. However, minimum efficient scale cannot be fully realized unless a steady “throughput” (the flow of materials through a plant) is attained. The throughput needed to maintain the optimal scale of production requires careful coordination not only of the flow of goods through the production process, but also of the flow of input from suppliers and the flow of output to wholesalers and final consumers. If throughput falls below a critical point, unit costs rise sharply and profits disappear. A manufacturer’s fixed costs and “sunk costs” (original capital investment in the physical plant) do not decrease when production declines due to inadequate supplies of raw materials, problems on the factory floor, or inefficient sales networks. Consequently, potential economies of scale are based on the physical and engineering characteristics of the production facilities—that is, on tangible capital—but realized economies of scale are operational and organizational, and depend on knowledge, skills, experience, and teamwork—that is, on organized human capabilities, or intangible capital.

The importance of investing in intangible capital becomes obvious when one looks at what happens in new capital-intensive manufacturing industries. Such industries are quickly dominated, not by the first firms to acquire technologically sophisticated plants of theoretically optimal size, but rather by the first to exploit the full potential of such plants. Once some firms achieve this, a market becomes extremely hard to enter. Challengers must construct comparable plants and do so after the first movers have already worked out problems with suppliers or with new production processes. Challengers must create distribution networks and marketing systems in markets where first movers have all the contacts and know-how. And challengers must recruit management teams to compete with those that have already mastered these functional and strategic activities.
4. The passage LEAST supports the inference that a manufacturer's throughput could be adversely affected by

A. a mistake in judgment regarding the selection of a wholesaler
B. a breakdown in the factory's machinery
C. a labor dispute on the factory floor
D. an increase in the cost per unit of output
E. a drop in the efficiency of the sales network

[Reveal] Spoiler:
D

OG2017 RC449-453 P 390

TRICKY

Passage: Economies of Scale
Question: Infer LEAST

The Simple Story

Manufacturers do have to build big plants (tangible capital) to achieve economies of scale, but doing so isn’t enough. The intangible capital (knowledge, experience, etc.) is at least as important. In fact, mastering the intangibles can lead to such great economies of scale that the company develops a market-dominant position, making it very hard for other competitors to join the market.

Sample Passage Map

Here is one way to map this passage. (Note: abbreviate as desired!)

P1. Econ of scale: Yes, need large plants. Also need good throughput.
Tangible (facilities) vs. Intangible (know-how, experience)

P2. Invest in Int.: important
1st to master Int. = dominate

Step 1: Identify the Question

This question is unusual. The word inference points to an Inference question, but the word LEAST turns the question around. Try reading it this way: What does the passage imply could adversely affect throughput? Four of the answers (the wrong ones) are things that could adversely affect throughput. The correct answer is something that would NOT adversely affect throughput (or would be least likely to adversely affect throughput).

Step 2: Find the Support

“The throughput needed to maintain the optimal scale of production requires careful coordination not only of the flow of goods through the production process, but also of the flow of input from suppliers and the flow of output to wholesalers and final consumers.”

Because the four incorrect answers will be in the passage, you may need to work backwards to some extent on this one (from the answer choices to the passage). To start, though, throughput requires careful coordination of the flow of goods (so you can infer that not having this coordination would adversely affect throughput). In addition, throughput requires careful coordination of the flow of input from suppliers and output to wholesalers and consumers. Again, you can infer that not having this coordination would adversely affect throughput.
Check the answers to see what you can cross off so far.

Step 4: Eliminate and Find a Match

You can eliminate answer (A) and possibly (E) via an initial scan based on the predicted answer above. For the other three choices, work backwards: check them against the rest of the paragraph.

(A) Throughput can be adversely affected by issues related to wholesalers. Eliminate this choice.
(B) This choice wasn’t addressed by the first part, so scan lower in the paragraph to find a match. Bingo! Line 21 mentions that production can decline due to problems on the factory floor; a breakdown of machinery is a problem. Eliminate this choice.
(C) This choice wasn’t addressed by the first part, so scan lower in the paragraph to find a match. Bingo! Line 21 mentions that production can decline due to problems on the factory floor; a labor dispute is a problem. Eliminate this choice.
(D) CORRECT. This is so tricky! The passage says that “If throughput falls below a critical point, unit costs rise sharply and profits disappear.” This statement seems to support the idea that unit costs would affect throughput—but be careful about the direction of that relationship. If throughput falls a great deal, then unit costs will go up sharply, yes. But if unit costs go up, that does NOT necessarily mean throughput will fall; it could stay the same or increase. In addition, notice the difference in scope: the passage addresses a sharp increase in costs. The answer mentions only an increase. If the unit cost goes up by a tiny amount, nothing else may be affected in the slightest.
(E) The sales network could be considered part of the company to wholesaler relationship, so eliminate this choice. Alternatively, line 22 states that production can decline due to inefficient sales networks.
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Re: Manufacturers have to do more than build large manufacturing [#permalink]

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27 Apr 2017, 06:49
1
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omidsa wrote:
Manufacturers have to do more than build large manufacturing plants to realize economies of scale. It is true that as the capacity of a manufacturing operation rises, costs per unit of output fall as plant size approaches “minimum efficient scale,” where the cost per unit of output reaches a minimum, determined roughly by the state of existing technology and size of the potential market. However, minimum efficient scale cannot be fully realized unless a steady “throughput” (the flow of materials through a plant) is attained. The throughput needed to maintain the optimal scale of production requires careful coordination not only of the flow of goods through the production process, but also of the flow of input from suppliers and the flow of output to wholesalers and final consumers. If throughput falls below a critical point, unit costs rise sharply and profits disappear. A manufacturer’s fixed costs and “sunk costs” (original capital investment in the physical plant) do not decrease when production declines due to inadequate supplies of raw materials, problems on the factory floor, or inefficient sales networks. Consequently, potential economies of scale are based on the physical and engineering characteristics of the production facilities—that is, on tangible capital—but realized economies of scale are operational and organizational, and depend on knowledge, skills, experience, and teamwork—that is, on organized human capabilities, or intangible capital.

The importance of investing in intangible capital becomes obvious when one looks at what happens in new capital-intensive manufacturing industries. Such industries are quickly dominated, not by the first firms to acquire technologically sophisticated plants of theoretically optimal size, but rather by the first to exploit the full potential of such plants. Once some firms achieve this, a market becomes extremely hard to enter. Challengers must construct comparable plants and do so after the first movers have already worked out problems with suppliers or with new production processes. Challengers must create distribution networks and marketing systems in markets where first movers have all the contacts and know-how. And challengers must recruit management teams to compete with those that have already mastered these functional and strategic activities.
5. The primary purpose of the passage is to

A. point out the importance of intangible capital for realizing economies of scale in manufacturing
B. show that manufacturers frequently gain a competitive advantage from investment in large manufacturing facilities
C. argue that large manufacturing facilities often fail because of inadequate investment in both tangible and intangible capital
D. suggest that most new industries are likely to be dominated by firms that build large manufacturing plants early
E. explain why large manufacturing plants usually do not help manufacturers achieve economies of scale

[Reveal] Spoiler:
A

OG2017 RC449-453 P 390

Passage: Economies of Scale
Question: Primary Purpose

The Simple Story

Manufacturers do have to build big plants (tangible capital) to achieve economies of scale, but doing so isn’t enough. The intangible capital (knowledge, experience, etc.) is at least as important. In fact, mastering the intangibles can lead to such great economies of scale that the company develops a market-dominant position, making it very hard for other competitors to join the market.

Sample Passage Map

Here is one way to map this passage. (Note: abbreviate as desired!)

P1. Econ of scale: Yes, need large plants. Also need good throughput.
Tangible (facilities) vs. Intangible (know-how, experience)

P2. Invest in Int.: important
1st to master Int. = dominate

Step 1: Identify the Question

The words primary purpose in the question stem indicate that this is a Primary Purpose, or main idea, question.

Step 2: Find the Support & Step 3: Predict an Answer

On main idea questions, your passage map (or your understanding of the passage in general) will provide the information you need to answer the question. Briefly reiterate the simple story to yourself: the author is focused on promoting the idea that economies of scale rely not just on tangible capital but on intangible capital as well.

Step 4: Eliminate and Find a Match

(A) CORRECT. This matches the pre-articulated position: Intangible capital is really important to achieve economies of scale. This choice doesn’t mention tangible capital because the author presents tangible capital as something that is already known or accepted; companies already invest in tangible capital. The main point is the importance of this other aspect that many companies overlook: intangible capital.

(B) This choice misses the main point: building a large facility, in and of itself, is not enough. The author argues that intangible capital must come into play in order to gain a large competitive advantage.

(C) This choice is tricky. The passage does intimate that inadequate investment in intangible capital can harm a company’s chances of success. It does NOT, however, suggest that investment in tangible capital is inadequate.

(D) This choice contradicts the main point: building a large facility, in and of itself, is not enough. The author argues that intangible capital must come into play in order to gain a large competitive advantage.

(E) This choice is tempting. The author does NOT argue that large plants in general do not help achieve economies of scale, only that large plants alone are not enough. The author argues that companies must also invest in intangible factors to help achieve economies of scale. The last paragraph, in fact, outlines how a company with large plants and strong intangibles can dominate a market.
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Re: Manufacturers have to do more than build large manufacturing [#permalink]

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02 Sep 2017, 11:16
HI,

can someone pleae explain how Q3 answer is A... I eliminated this choice by seeing word "Example"...

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Re: Manufacturers have to do more than build large manufacturing [#permalink]

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25 Sep 2017, 21:06
What should be the effective strategy for this type of RCs. ?
It's a long RC. Please share the workaround.
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Re: Manufacturers have to do more than build large manufacturing [#permalink]

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05 Oct 2017, 18:31
omidsa wrote:
The Official Guide for GMAT Review, 13th Edition, 2012

Practice Question
Question No.: RC 37 ~ 41
Page: 382

Manufacturers have to do more than build large manufacturing plants to realize economies of scale. It is true that as the capacity of a manufacturing operation rises, costs per unit of output fall as plant size approaches “minimum efficient scale,” where the cost per unit of output reaches a minimum, determined roughly by the state of existing technology and size of the potential market. However, minimum efficient scale cannot be fully realized unless a steady “throughput” (the flow of materials through a plant) is attained. The throughput needed to maintain the optimal scale of production requires careful coordination not only of the flow of goods through the production process, but also of the flow of input from suppliers and the flow of output to wholesalers and final consumers. If throughput falls below a critical point, unit costs rise sharply and profits disappear. A manufacturer’s fixed costs and “sunk costs” (original capital investment in the physical plant) do not decrease when production declines due to inadequate supplies of raw materials, problems on the factory floor, or inefficient sales networks. Consequently, potential economies of scale are based on the physical and engineering characteristics of the production facilities—that is, on tangible capital—but realized economies of scale are operational and organizational, and depend on knowledge, skills, experience, and teamwork—that is, on organized human capabilities, or intangible capital.

The importance of investing in intangible capital becomes obvious when one looks at what happens in new capital-intensive manufacturing industries. Such industries are quickly dominated, not by the first firms to acquire technologically sophisticated plants of theoretically optimal size, but rather by the first to exploit the full potential of such plants. Once some firms achieve this, a market becomes extremely hard to enter. Challengers must construct comparable plants and do so after the first movers have already worked out problems with suppliers or with new production processes. Challengers must create distribution networks and marketing systems in markets where first movers have all the contacts and know-how. And challengers must recruit management teams to compete with those that have already mastered these functional and strategic activities.
1. The passage suggests that in order for a manufacturer in a capital-intensive industry to have a decisive advantage over competitors making similar products, the manufacturer must

A. be the first in the industry to build production facilities of theoretically optimal size
B. make every effort to keep fixed and sunk costs as low as possible
C. be one of the first to operate its manufacturing plants at minimum efficient scale
D. produce goods of higher quality than those produced by direct competitors
E. stockpile raw materials at production sites in order to ensure a steady flow of such materials

Passage: Economies of Scale

The Simple Story

Manufacturers do have to build big plants (tangible capital) to achieve economies of scale, but doing so isn’t enough. The intangible capital (knowledge, experience, etc.) is at least as important. In fact, mastering the intangibles can lead to such great economies of scale that the company develops a market-dominant position, making it very hard for other competitors to join the market.

Sample Passage Map

Here is one way to map this passage. (Note: abbreviate as desired!)

P1. Econ of scale: Yes, need large plants. Also need good throughput.
Tangible (facilities) vs. Intangible (know-how, experience)

P2. Invest in Int.: important
1st to master Int. = dominate

Step 1: Identify the Question

The word suggests in the question stem indicates that this is an Inference question. Specifically, what can you infer regarding what a manufacturer must do in order to gain a decisive advantage?

Step 2: Find the Support

Overall, the correct question should go along with the main idea that it is important to invest in intangible capital, not just tangible capital (in which everyone already invests).

Where does the author talk about competitive advantage? Primarily in paragraph two:

Such industries are quickly dominated, not by the first firms to acquire technologically sophisticated plants of theoretically optimal size, but rather by the first to exploit the full potential of such plants. Once some firms achieve this, a market becomes extremely hard to enter.”

It isn’t necessary to be the first to build a plant, but it is important to be one of the first to maximize the full potential of a plant. What is the full potential? It has to do with maximizing economies of scale. From paragraph one:

“ … costs per unit of output fall as plant size approaches “minimum efficient scale,” where the cost per unit of output reaches a minimum, determined roughly by the state of existing technology and size of the potential market.”

It’s crucial, then, to be among the first to figure out how to achieve economies of scale (aka, minimum efficient scale). If so, then you may be able to dominate the market.

Step 4: Eliminate and Find a Match

(A) This choice may be tempting because it copies language from the passage exactly, but the underlying message contradicts the passage. The important thing is not necessarily to be the first to build up that plant; rather, it’s important to be among the first to achieve economies of scale.

(B) The first paragraph does mention fixed and sunk costs, but does not do so in the context of competitive advantage in particular.

(C) CORRECT. This choice matches the predicted answer: the first company or companies to achieve economies of scale can dominate the market.

(D) This choice sounds great in the real world (quality must be important, right?) but the passage does not address quality as a factor in gaining competitive advantage.

(E) The first paragraph does discuss the importance of ensuring a steady flow of raw materials, but does not do so in the context of competitive advantage in particular. (And note that a steady flow is not the same thing as stockpiling.)
_________________

"Be challenged at EVERY MOMENT."

“Strength doesn’t come from what you can do. It comes from overcoming the things you once thought you couldn’t.”

"Each stage of the journey is crucial to attaining new heights of knowledge."

Kudos [?]: 1177 [0], given: 415

Re: Manufacturers have to do more than build large manufacturing   [#permalink] 05 Oct 2017, 18:31
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