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Unformatted text preview: Analyzing behavior of costs (p62-64) • The value chain provides the basic tool for cost analysis • Cost drivers – The structural determinants of the cost of an activity, and differ in the extent to which a firm controls them. o Determine behavior of costs within an activity, reflecting any linkages or interrelationships that affect it Cost advantage (p97-118) • Cost advantage – A firm’s cumulative cost of performing all value activities is lower than competitors’ costs o Hinges on its sustainability o Sustainability – Present if the sources of a firm’s cost advantage are difficult for competitors to replicate or imitate • A firm’s relative cost position is a function of: o Composition of its value chain versus competitors o Relative position in relation to the cost drivers of each activity • If competitors’ value chains are different from that of the firm, the inherent efficiency of the two chains will determine relative cost position • Determining the relative costs of competitors o Value chain – The basic tool for determining competitor costs o Usually possible to estimate directly the cost of some of a competitor’s value activities from commonly available public data as well as from interview with buyers, suppliers, and others o OR determine the relative position with suspect to cost drivers and estimate differences in competitors cost • Gaining cost advantage o Two major ways that a firm can gain a cost advantage: Control cost drivers – A firm can gain an advantage with respect to the cost driver of value activities representing a significant proportion of total costs Reconfigure the value chain – A firm can adopt a different and more efficient way to design, produce, distribute, or market the product *Not mutually exclusive o Derive cost advantage from multiple sources within the value chain o Cost leaders have culture emanating from senior management that reinforces such behavior (i.e. Spartan facilities) o Cost reduction may or may not erode differentiation • Controlling cost drivers (TEN) (I IDLE STILL) 1. Controlling Scale a. Increasing scale through acquisitions, product line extensions, market expansion, or marketing activity can lower cost i. However, the type of scale that drives cost usually differs by activity ii. Should be selectively tuned to the type of scale that drives the cost of important activities in the particular industry b. Reinforce scale economies i. Scale economies are partly a function of how activities are managed c. Exploit scale economies that favor firms d. Emphasize value activities driven by advantageous scale 2. Controlling Learning a. Manage with the learning curve i. Learning – Does not occur automatically, but results from the effort and attention of management and employees ii. Every premise and every practice must be examined for possible revision 1. Establish targets iii. The sharing of learning is often impeded by geographic distance and internal rivalry...
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- Spring '08
- Management, interrelationships, business units, Horizontal Organization