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Strategies in Economic Analysis of Cost and Differentiation Positions

Discover methods to analyze cost positions by disaggregating costs based on behavior, inputs, and activities. Learn about direct material, labor, and indirect manufacturing costs, activity-cost analysis, and cost drivers influencing firm size and experience. Explore benefit drivers, including physical, ancillary, and delivery characteristics. Gain insights into customer perception mapping and optimizing benefits for consumers.

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Strategies in Economic Analysis of Cost and Differentiation Positions

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  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

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