Economics of Strategy Analyzing Cost and Differentiation Positions

1. Economics of StrategyAnalyzing Cost and Differentiation Positions

2. Analyzing Cost Positions • Two major methods • disaggregate the various cost measures • identify cost drivers

3. Disaggregating Costs • by behavior • by classes of inputs • by activity

4. ...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

5. …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)

6. Direct Material Costs • costs of materials found in the final product • beer • hops, sugar, yeast, water, bottles, caps

7. Direct Labor Costs • costs of labor traceable to the physical production of the product

8. 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

9. Activity-Cost Analysis • Assign costs to activities in the value chain • McKinsey Business System Framework • technology • product design • manufacturing • marketing • distribution • service

10. 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

11. Cost Drivers - firm size or scope • economies of scale • economies of scope

12. Cost Drivers - cumulative experience • learning curves

13. Cost Drivers - not related to scale, scope, orcumulativeexperience • input prices • location • economies of density • complexity/focus

14. Cost Drivers - not related to scale, scope, orcumulativeexperience • process efficiency • discretionary policies • government policies

15. Cost Drivers - organization of transactions • Holdup • Leakage of private information • Coordination problems • Agency Costs

16. 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

17. Analyzing Benefit Drivers • increase perceived benefits to consumers • five major categories of drivers

18. Physical characteristics • performance • quality • durability • features • ease-of-use • aesthetics, color, style

19. Ancillary Characteristics • service after the sale • warranty • customer service • product training • support services

20. 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

21. Consumer expectations/perceptions • stability of the company • customer loyalty

22. Subjective image • psychological attachments formed by • peer groups • advertising • packaging • labeling • popularity • culture

23. Analyzing Benefit Drivers • Customer Perception Map • p. 524, figure 13.5