![Page 1: Economics of Strategy Analyzing Cost and Differentiation Positions](https://reader035.vdocument.in/reader035/viewer/2022062421/56649e1a5503460f94b0817e/html5/thumbnails/1.jpg)
Economics of Strategy
Analyzing Cost and Differentiation Positions
![Page 2: Economics of Strategy Analyzing Cost and Differentiation Positions](https://reader035.vdocument.in/reader035/viewer/2022062421/56649e1a5503460f94b0817e/html5/thumbnails/2.jpg)
Analyzing Cost Positions
• Two major methods– disaggregate the various cost measures– identify cost drivers
![Page 3: Economics of Strategy Analyzing Cost and Differentiation Positions](https://reader035.vdocument.in/reader035/viewer/2022062421/56649e1a5503460f94b0817e/html5/thumbnails/3.jpg)
Disaggregating Costs
• by behavior
• by classes of inputs
• by activity
![Page 4: Economics of Strategy Analyzing Cost and Differentiation Positions](https://reader035.vdocument.in/reader035/viewer/2022062421/56649e1a5503460f94b0817e/html5/thumbnails/4.jpg)
...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
![Page 5: Economics of Strategy Analyzing Cost and Differentiation Positions](https://reader035.vdocument.in/reader035/viewer/2022062421/56649e1a5503460f94b0817e/html5/thumbnails/5.jpg)
…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)
![Page 6: Economics of Strategy Analyzing Cost and Differentiation Positions](https://reader035.vdocument.in/reader035/viewer/2022062421/56649e1a5503460f94b0817e/html5/thumbnails/6.jpg)
Direct Material Costs
• costs of materials found in the final product– beer
• hops, sugar, yeast, water, bottles, caps
![Page 7: Economics of Strategy Analyzing Cost and Differentiation Positions](https://reader035.vdocument.in/reader035/viewer/2022062421/56649e1a5503460f94b0817e/html5/thumbnails/7.jpg)
Direct Labor Costs
• costs of labor traceable to the physical production of the product
![Page 8: Economics of Strategy Analyzing Cost and Differentiation Positions](https://reader035.vdocument.in/reader035/viewer/2022062421/56649e1a5503460f94b0817e/html5/thumbnails/8.jpg)
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
![Page 9: Economics of Strategy Analyzing Cost and Differentiation Positions](https://reader035.vdocument.in/reader035/viewer/2022062421/56649e1a5503460f94b0817e/html5/thumbnails/9.jpg)
Activity-Cost Analysis
• Assign costs to activities in the value chain
• McKinsey Business System Framework– technology– product design– manufacturing– marketing– distribution– service
![Page 10: Economics of Strategy Analyzing Cost and Differentiation Positions](https://reader035.vdocument.in/reader035/viewer/2022062421/56649e1a5503460f94b0817e/html5/thumbnails/10.jpg)
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
![Page 11: Economics of Strategy Analyzing Cost and Differentiation Positions](https://reader035.vdocument.in/reader035/viewer/2022062421/56649e1a5503460f94b0817e/html5/thumbnails/11.jpg)
Cost Drivers - firm size or scope
• economies of scale
• economies of scope
![Page 12: Economics of Strategy Analyzing Cost and Differentiation Positions](https://reader035.vdocument.in/reader035/viewer/2022062421/56649e1a5503460f94b0817e/html5/thumbnails/12.jpg)
Cost Drivers - cumulative experience
• learning curves
![Page 13: Economics of Strategy Analyzing Cost and Differentiation Positions](https://reader035.vdocument.in/reader035/viewer/2022062421/56649e1a5503460f94b0817e/html5/thumbnails/13.jpg)
Cost Drivers - not related to scale, scope, or cumulative experience
• input prices
• location
• economies of density
• complexity/focus
![Page 14: Economics of Strategy Analyzing Cost and Differentiation Positions](https://reader035.vdocument.in/reader035/viewer/2022062421/56649e1a5503460f94b0817e/html5/thumbnails/14.jpg)
Cost Drivers - not related to scale, scope, or cumulative experience
• process efficiency
• discretionary policies
• government policies
![Page 15: Economics of Strategy Analyzing Cost and Differentiation Positions](https://reader035.vdocument.in/reader035/viewer/2022062421/56649e1a5503460f94b0817e/html5/thumbnails/15.jpg)
Cost Drivers - organization of transactions
• Holdup
• Leakage of private information
• Coordination problems
• Agency Costs
![Page 16: Economics of Strategy Analyzing Cost and Differentiation Positions](https://reader035.vdocument.in/reader035/viewer/2022062421/56649e1a5503460f94b0817e/html5/thumbnails/16.jpg)
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
![Page 17: Economics of Strategy Analyzing Cost and Differentiation Positions](https://reader035.vdocument.in/reader035/viewer/2022062421/56649e1a5503460f94b0817e/html5/thumbnails/17.jpg)
Analyzing Benefit Drivers
• increase perceived benefits to consumers
• five major categories of drivers
![Page 18: Economics of Strategy Analyzing Cost and Differentiation Positions](https://reader035.vdocument.in/reader035/viewer/2022062421/56649e1a5503460f94b0817e/html5/thumbnails/18.jpg)
Physical characteristics
• performance
• quality
• durability
• features
• ease-of-use
• aesthetics, color, style
![Page 19: Economics of Strategy Analyzing Cost and Differentiation Positions](https://reader035.vdocument.in/reader035/viewer/2022062421/56649e1a5503460f94b0817e/html5/thumbnails/19.jpg)
Ancillary Characteristics
• service after the sale– warranty– customer service– product training– support services
![Page 20: Economics of Strategy Analyzing Cost and Differentiation Positions](https://reader035.vdocument.in/reader035/viewer/2022062421/56649e1a5503460f94b0817e/html5/thumbnails/20.jpg)
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
![Page 21: Economics of Strategy Analyzing Cost and Differentiation Positions](https://reader035.vdocument.in/reader035/viewer/2022062421/56649e1a5503460f94b0817e/html5/thumbnails/21.jpg)
Consumer expectations/perceptions
• stability of the company
• customer loyalty
![Page 22: Economics of Strategy Analyzing Cost and Differentiation Positions](https://reader035.vdocument.in/reader035/viewer/2022062421/56649e1a5503460f94b0817e/html5/thumbnails/22.jpg)
Subjective image
• psychological attachments formed by– peer groups– advertising– packaging– labeling– popularity– culture
![Page 23: Economics of Strategy Analyzing Cost and Differentiation Positions](https://reader035.vdocument.in/reader035/viewer/2022062421/56649e1a5503460f94b0817e/html5/thumbnails/23.jpg)
Analyzing Benefit Drivers
• Customer Perception Map– p. 524, figure 13.5