economics of strategy analyzing cost and differentiation positions
TRANSCRIPT
Economics of Strategy
Analyzing Cost and Differentiation Positions
Analyzing Cost Positions
• Two major methods– disaggregate the various cost measures– identify cost drivers
Disaggregating Costs
• by behavior
• by classes of inputs
• by activity
...by behavior
• Useful for decision-making, particularly exit and entry decisions
• Classify as fixed, variable, or semi-fixed costs
• Focus on time framework for the particular decision
…by classes of inputs
• Traditional Accounting– manufacturing expenses
• Direct material costs + direct labor costs+ indirect manufacturing costs
– non-manufacturing expenses• selling, advertising, promotion, administrative,
R&D
• Usually reported as SGA (selling and general administrative expenses)
Direct Material Costs
• costs of materials found in the final product– beer
• hops, sugar, yeast, water, bottles, caps
Direct Labor Costs
• costs of labor traceable to the physical production of the product
Indirect Manufacturing Costs
• all costs not in the above two categories– indirect labor costs– materials overhead– general factory administrative personnel– facilities and equipment costs– engineering costs
Activity-Cost Analysis
• Assign costs to activities in the value chain
• McKinsey Business System Framework– technology– product design– manufacturing– marketing– distribution– service
Cost Drivers
• those related to firm size or scope
• those related to cumulative experience
• those independent of firm size or scope or cumulative experience
• those related to the organization of transactions
Cost Drivers - firm size or scope
• economies of scale
• economies of scope
Cost Drivers - cumulative experience
• learning curves
Cost Drivers - not related to scale, scope, or cumulative experience
• input prices
• location
• economies of density
• complexity/focus
Cost Drivers - not related to scale, scope, or cumulative experience
• process efficiency
• discretionary policies
• government policies
Cost Drivers - organization of transactions
• Holdup
• Leakage of private information
• Coordination problems
• Agency Costs
Suggestions
• View the firm as a collection of activities– cost savings can come from factors affecting
the activity itself– cost savings can come from a rearrangement of
the flow or order of the activities
• Technology almost always provides opportunities for cost reductions and if it doesn't yield them it will soon be gone
Analyzing Benefit Drivers
• increase perceived benefits to consumers
• five major categories of drivers
Physical characteristics
• performance
• quality
• durability
• features
• ease-of-use
• aesthetics, color, style
Ancillary Characteristics
• service after the sale– warranty– customer service– product training– support services
Sale or Delivery Characteristics
• conditions for financing the product
• spatial location of sales facilities
• speed of delivery
• conditions of delivery
• return policies
• pre-sale product explanations
Consumer expectations/perceptions
• stability of the company
• customer loyalty
Subjective image
• psychological attachments formed by– peer groups– advertising– packaging– labeling– popularity– culture
Analyzing Benefit Drivers
• Customer Perception Map– p. 524, figure 13.5