Developing a Competitive Strategy;

Contemporary Cost Management

Techniques
Chapter 4
 Strategic Measure of Success
 Firms use cost management to support their
strategic goals. The strategic cost management
system develops strategic information, including
both financial and non- financial information.
 Financial performance measures includes:
› 1. growth in sale earnings
› 2. cash flows
› 3. stock prices
 Strategic Measure of Success
 Non-financial measures of operation include
among others
› Market share
› Product quality
› Customer satisfaction
› Growth opportunities

› Note: Strategic financial and non-financial measures of

success are also commonly called CRITICAL
SUCCESS FACTORS (CSFs)
 Financial and Non Financial Measures of
Success or Critical Success Factors and How
To Measure CSF
 Financial Measure of Success
Critical Success Factors How To Measure CSF

Sales Level of sales in critical product groups, sales

trend. Percent of sales from new products, sales
forecast accuracy.

Profitability Earnings from operation, earnings trend,

dividend growth
Liquidity Cash flow, trend in cash flow, interest
coverage, asset turnover, inventory turnover,
receivables turnover, credit ratings

Market Value Share price

 Non-Financial Measures of Success Customer Factors

Customer Satisfaction Customer returns and complaints, customer

survey
Dealer and Distributor Coverage and strength of dealer and distributor
channel relationships
Marketing and Selling Trends in sales performance, training, market
research activities, measured in hour or peso.
Timeliness of delivery On-time delivery performance, time from order
to customer receipt
Quality Customer complaints, warranty expense
 Internal Business Process

Quality Number of defects, number of returns,

customer survey, amount of scrap, amount
of rework, field service reports, warranty
claims, vendor quality defects.
Productivity Cycle time (from raw materials to finished
product, labor efficiency; machine efficiency;
amount of waste, rework and scrap
Flexibility Setup time, cycle time
Equipment readiness Downtime, operator experience, machine
capacity, maintenance activities.
Safety Number of accidents, effects and accidents.
 Without strategic information, the firm is likely
to stray from its competitive course, to make
strategically wrong manufacturing and marketing
decisions, to choose the wrong products or the
wrong customers
 Consequence of Lack of Strategic
Information
 Decision making based on intuition
 Lack of clarity about direction and goals
 Lack of clear and favorable perception of the firm by
customers and suppliers
 Incorrect investment decisions; choosing products, markets
or manufacturing processes inconsistent with strategic goals.
 Inability to effectively benchmark competitors, resulting in
lack of knowledge about more effective competitive
strategies.
 Failure to identify most profitable products, customer and
markets.
 COMPETITIVE STRATEGIES

 Cost Leadership. Is a competitive strategy in

which a firm succeeds in producing products or
services at the LOWEST cost in the industry.

 Product Differentiation. The differentiation

strategy is implemented by creating a perception
among consumers that the product or service is
UNIQUE in some important way, usually by
being of higher quality, features or innovation.
 Distinctive Aspects of the Two
Competitive Strategies
Aspect Cost Leadership Differentiation
Strategic target Broad cross section of the Focused section of the market
market
Basis of competitive Lowest cost in the industry Unique product or service
advantage
Product Line Limited selection Wide variety, differentiating
features,

Product emphasis Lowest possible cost with high Innovation in differentiating

quality and essential product products
features.

Market emphasis Low price Premium price and innovative

differentiating features
 Contemporary Cost Management
Techniques
 JUST IN TIME (JIT)
 Total Quality Management
 Process Reengineering
 Benchmarking
 Mass Customization
 Balance Scorecard
 Activity-Based Costing and Management
 Theory of Constraints (TOC)
 Life-cycle Costing
 Target Costing
 Computer-aided design and Manufacturing
 Automation
 E-Commerce
 The Value Chain and Supply Chain Analysis
 Total Quality Management
 TQM. Is a technique in which management develops
policies and practices to ensure that the firm’s products
and services exceed customers’ satisfaction.
 With TQM develop a company that stresses listening to
the needs of customers, making products right the first
time, reducing defective products that must be reworked
and encouraging workers to continuously improve their
production process.
 2 major characteristic of TQM
 1. a focus on serving customers
 2. systematic problem-solving using teams made up of
front-line workers.
 Just in Time (JIT)
 JIT. Is the philosophy that activities and
undertaken only as needed or demanded. Its a
production system aka pull it through approach,
in which materials are purchased and units are
produced only as needed to meet actual customer
demand.
 JIT Production. A system in which each
component on a production line is produced
immediately as needed by the next step in the
production line.
 Financial Benefits of JIT
 Lower investment in inventories
 Reductions in carrying and handling costs of
inventories.
 Reductions in risk of obsolescence of inventories
 Lower investment in plant space for inventories
and production.
 Process Reengineering
 Reengineering. Is a process for creating
competitive advantage in which a firm reorganizes
its operating and management functions, often with
the result that jobs are modified, combined, or
eliminated.
 “Fundamental rethinking and radical redesign of
business processes to achieve dramatic
improvements in critical, contemporary measures
of performance, such as cost, quality, service and
speed.
 Process Reengineering

 The main objective of this approach is the

simplification and elimination of wasted effort
and the central idea is that all activities that do
not add value to product or service should be
eliminated.
 Benchmarking

 Benchmarking. Is a process by which a firm.

› [Link] the critical success factors
› 2. studies the best practices of other firms (or other
units within a firm) for achieving these critical success
factors.
› 3. implements improvements in the firm’s processes
to match or beat the performance of those
competitors.
 Mass Customization

 Mass customization. Is a management technique

in which marketing and production processes are
designed to handle the increased variety that
results from delivering customized products and
services to customers.
 Balance Scorecard

 The balance scorecard is an accounting report

that includes the firm’s critical success factors in
four areas.
› Financial performance
› Customer satisfaction
› Internal business process
› Innovation and learning
 Activity Based Cost Management

 Activity analysis. Is used to develop a detailed

description of the specific activities performed in
the operations of the firm
 ABC. Is used to improve the accuracy of cost
analysis by improving the tracing of costs to
products or to individual customers.
 ABM. Uses activity analysis to improve
operational control and management control
 Theory of Constraints

 TOC. Is a sequential process of identifying and

removing constraints in a system.
 The TOC approach is a perfect complement to
TQM and Process Reengineering- it focuses
improvement efforts where they are likely to be
most effective.
 Life Cycle Costing

 LCC. Is a management technique to identify and

monitor the costs of a product throughout its
lifecycle.
 Target Costing

 Involves the determination of the desired cost for

a product or the basis of a given competitive
price so that the product will earn a desired
profit.

 Target cost= Market determined price-Desired

Profit
 Computer-Aided Design and
Manufacturing
 CAD. Is the use of computers in product
development, analysis, and design modification
to improve the quality and performance of the
product.
 CAM. Is the use of computers to plan,
implement, and control production.
 Automation

 Flexible manufacturing system. Is a

computerized network of automated equipment
that produces one or more groups of parts or
variations of a product in a flexible manner.
 Computer integrated manufacturing (CIM). Is
a manufacturing system that totally integrates all
office and factory functions within a company via
a computer-based information network to allow
hour by hour manufacturing management.
 E-commerce

 The internet has important advantages over more

conventional marketplaces for some kinds of
transaction.
 The Value Chain

 Value chain. Refers to the sequence of business

functions in which usefulness is added to the
products or services of a company.
 An analysis tool that firms use to identify the
specific steps required to provide a product or
service to the customer.
 The Value Chain

 Analyzing the firm’s value helps management

discover:
› Which steps or activities are not competitive.
› Where costs can be reduced
› Which activity should be outsourced
› How to increase value for the customer at one or more
of the steps of value chain.