If

Customer sacrifice. This includes the cost of customer value = customer realization –
purchasing the product, the time and effort spent customer sacrifice
in acquiring and learning to use the product, and then, a differentiation strategy increases
after-purchase costs, which are costs of using, customer value by providing something to
maintaining, and disposing of the product. customers that is not provided by competitors
Value chain. This pertains to the linked set of creating product characteristics (functional,
value-creating activities from basic raw materials aesthetic, or stylistic) that set the product
to the disposal of the finished product by end-use apart from its competitors
customers. Examples: a food provider offering free delivery
Supply chain. This is the sequence of processes service unusual to competitors, a retailer
involved in the production and distribution of a offering on-site repair service not offered by
commodity describing the relationship between a rivals, a producer of personal computers,
supplier and a customer. laptops and cellular phones such as Apple Inc.
using an exclusive operating system not
Organizational activities. These are actions taken
compatible with other brands
to sustain the operations of the organization.
Operational activities. These are activities There is competitive advantage if the following
directly related to the production of goods or are achieved: a. Customers must see the
services. variations as important. b. The value added to the
customer by differentiation must exceed the
Cost driver. It is anything that causes the
incurrence of a cost. It may be an object, event firm’s costs of providing the differentiation.
or activity, depending on the cost management
approach used. FOCUSING STRATEGY
Objective: To establish competitive advantage by
Product life cycle. In this section, this is regarded selecting or emphasizing a market or customer
as the producer’s viewpoint on the product life segment in which to compete.
cycle which has two versions. 13. Consumable life
If
cycle. This is the consumer’s viewpoint on the customer value = customer realization –
product’s lifecycle customer sacrifice
COST LEADERSHIP STRATEGY then, a focusing strategy increases customer
value
Objective: To provide the same or better value to
customers at a lower cost than offered by thru the following ways:
competitors. a. Select the markets and customers that appear
attractive and then develop the capabilities to
If serve these targeted segments.
Customer value= customer realization- b. Select specific segments (e.g. customers and
customer sacrifice geographic regions) where the firm’s core
then, a low-cost strategy increases customer competencies in the segments are superior to
value by minimizing customer sacrifice those of competitors.
Firms may choose not just one general strategy,
Examples: redesigning a product so that fewer
but a combination of strategies.
parts are needed, lowering production costs and
the costs of maintaining the product after
STRATEGIC POSITIONING
purchase
The process of selecting the optimal mix of these
DIFFERENTIATION STRATEGY three general strategic approaches with the end
Objective: To increase customer value by view of creating a sustainable competitive
increasing what the customer receives (customer advantage
realization) Strategy may include the following:
.
a. choosing the market and customer segments advantage b. classify as organizational activities
the business unit intends to serve, and operational activities c. determine the costs
b. identifying the critical internal business of these activities with the use of organizational
processes that the unit must excel at to deliver and operational cost drivers; refer to examples
the value propositions to customers in the below
targeted market segments, Structural Activities Drivers
c. selecting the individual and organizational Building number of plants, scale,
capabilities required for the internal, customer, plants degree of centralization
and d. financial objectives. Management management style and
structuring philosophy
What is the role of cost management in strategic
positioning? objective of strategic cost Grouping number and type of work
management is to reduce costs while employees units
simultaneously strengthening the selected Having number of product lines,
strategic position Remember that competitive complexity number of unique processes,
advantage is tied to costs. number of unique parts,
degree of complexity
VALUE-CHAIN ANALYSIS Vertical scope, buying power, selling
-basic to successful implementation of cost integrating power
leadership and differentiation strategies Selecting types of process
and using technologies, experience
Companies add value through the following
process
events and activities: technologies
1. Research and Development–the generation of,
and experimentation with, ideas related to new Executional Drivers
products, services or processes Activities
2. Design of products, services, or processes–the Using employees degree of involvement
detailed planning and engineering of products, Providing quality quality management
services, or processes approach
Providing plant plant layout efficiency
3. Production–the acquisition, coordination, and
layout
assembly of resources to produce a product or Designing and product configuration
deliver a service producing products
4. Marketing–the manner by which companies Providing capacity capacity utilization
promote and sell their products or services to
customers or perspective customers OPERATIONAL ACTIVITIES AND DRIVERS
5. Distribution–the delivery of products or Unit-Level Activities Drivers
services to customers Grinding parts Grinding machine hours
6. Customer Service–the after-sale support Assembling parts Assembly labor hours
provided to customers Drilling holes Drilling machine hours
Using materials Pounds of material
Value-chain analysis relies on identifying and Using power Number of kilowatt-
exploiting internal and external linkages. hours
Internal linkages-relationships among activities Batch-Level Drivers
Activities
that are performed within a firm’s portion of the
Setting up equipment Number of setups
value chain
Moving batches Number of moves
External linkages-describe the relationship of a Inspecting batches Inspection hours
firm’s value-chain activities that are performed Reworking products Number of defective
with its suppliers and customers units
To exploit these linkages, Product-Level Drivers
a. identify activities and select those that can be Activities
used to produce (or sustain) a competitive
 Redesigning products Number of change
orders
Expediting Number of late orders
Scheduling Number of different
products
Testing products Number of procedures
a

Activity Drivers
-explain changes in activity costs by measuring
changes in activity output (usage)
2 major categories:
1. Unit-level drivers – explain changes in cost as
units produced changes (ex. pounds of DM. Product Life-Cycle Stages
kilowatt-hours used to run production machinery, 1. Introduction stage-characterized by
and DLH preproduction and startup activities; focused on
2. Non-unit-level drivers – explain how costs obtaining a foothold in the market; no sales for
change as factors other than the number of units a period of time (the preproduction period); and,
produced changes (ex. number of set-ups, work then slow sales growth as the product is
orders, engineering change orders, inspection introduced
hours and material moves) 2. Growth stage-a period of time when sales
increase more quickly
In a traditional cost management system-cost 3. Maturity stage-is a period of time when sales
behavior is assumed to be described by unit-based increase more slowly. Eventually, the slope (of
drivers only the sales curve) in the maturity stage becomes
In activity-based cost management system-both neutral and then turns negative
unit and non-unit-based drivers are used; thus, 4. Decline stage-when the product loses market
provides much richer view of cost behavior acceptance and sales begin to decrease

LIFE-CYCLE COST MANAGEMENT Production Viewpoint -defines stages of the life

Life-cycle cost management is considered a type cycle by changes in the type of activities
of strategic cost analysis. It requires an performed
understanding of the three types of life-cycle
viewpoints: the marketing viewpoint, the
production viewpoint, and the consumable life
viewpoint. By considering the interrelationships
among the three viewpoints, managers develop
insights that help maximize life-cycle profits.

PRODUCT LIFE-CYCLE (Producer Viewpoint)

In life cycle, product may refer to a class (i.e.
automobiles) or specific form (i.e. station wagon)
or specific brand or model (i.e. Subaru Outback). Product Life-Cycle Activities
There are two viewpoints concerning product life 1. Research activities (product conception)
cycle: the marketing viewpoint and the production 2. Development activities (planning, design, and
viewpoint. testing)
3. Production activities (conversion activities),
Marketing Viewpoint -describes the general sales and
pattern of a product 4. Logistical activities (advertising, distribution,
warranty, customer service, product servicing,
and so on)
Difference between viewpoints: costs in the design stage by considering and
production viewpoint emphasizes life-cycle costs exploiting both customer and supplier linkages
market viewpoint emphasizes sales revenue
behavior target = sales price needed to capture - desired
per-unit cost predetermined market share profit
Life-cycle costs-all costs associated with the
product for its entire life cycle 90% or more are sales price -reflects the product specifications
committed during the development stage of the or functions valued by the customer (referred to
product’s life cycle as product functionality) If the target cost is
less than what is currently achievable, then
Committed-most of the costs that will be incurred management must find cost reductions that move
are predetermined, set by the nature of the the actual cost toward the target cost.
product design and the processes needed to
produce the design Three cost reduction methods:
(1) reverse engineering-a “tear down” analysis
Consumable Life-Cycle (Consumer Viewpoint) whereby the competitors’ products are closely
-emphasizes product performance for a given analyzed to discover more design features that
price (costs of ownership) create cost reductions
-costs of ownership includes costs related to the (2) value analysis-attempts to assess the value
consumption life-cycle activities placed on various product functions by
-total customer satisfaction is affected by both customers
purchase price and post-purchase costs (3) process improvement-redesigning processes
to improve efficiency and achieve needed cost
Consumption Life-Cycle activities: reductions
(1) purchasing;
(2) operating; 1. Strategic performance management system.
This system utilizes performance measures and
(3) maintaining; and
(4) disposal evaluation designed to support the organization’s
strategy and objectives.
Life-Cycle Cost Management 2. Balanced scorecard. This is a performance
(Interactive Viewpoint) management system that puts strategy at the
-an integration of the three life-cycle viewpoints center of attaining organizational goals and
that can be useful to producers of goods and objectives.
services 3. Lag measures. These are outcome measures or
-consists of actions taken that cause a product measures of results from past efforts. Example:
to be designed, developed, produced, marketed, customer profitability
distributed, operated, maintained, serviced, and 4. Lead measures. These are performance drivers
disposed of so that lifecycle profits are or factors that drive future performance.
maximized Example: hours of employee training
5. Objective measures. Those measures that can
Ways of maximizing profit be readily quantified and verified. Example:
(1) revenue enhancement market share
(2) cost reduction opportunities 6. Subjective measures. Those measures that are
less quantifiable and more judgmental in nature.
Life-cycle cost management emphasizes cost Example: employee capabilities
reduction, not cost control. 7. Financial measures. Those measures expressed
in monetary terms. Example: Net Profit (Loss) 8.
Role of Target Costing
Nonfinancial measures. Those measures that use
-plays an essential role in life-cycle cost
management by providing a method for reducing nonmonetary units. Example: number of
dissatisfied customers
9. External measures. Those measures that relate which has three strategic themes: revenue
to customers and shareholders. Example: growth, cost reduction and asset utilization
customer satisfaction and ROI
10. Internal measures. Those measures that Objectives Measures
relate to the processes and capabilities that Revenue Growth
create value for customers and shareholders. Increase the Percentage of revenues
Example: process efficiency and employee number of new from new products
satisfaction products
Create new Percentage of revenues
applications from new applications
STRATEGIC PERFORMANCE MANAGEMENT SYSTEM
Develop new Percentage of revenues
Different Models
customers and from new sources
a. Traditional approach-uses performance markets
measures which are almost always financial Adopt a new pricing Product and customer
b. Activity-based approach-utilizes financial and strategy profitability
process-oriented measures
c. Strategic-based approach-adds refinements to Cost Reduction
the activity-based measures that translates the Reduce unit Unit product cost
organization’s strategy product cost
Reduce unit Unit customer cost
The organization’s strategy is translated into customer cost
objectives and measures. To align individual and Reduce distribution Cost per distribution
organizational goals and initiatives, these channel cost channel
objectives and measures must be clearly Asset Utilization
understood, communicated and acted upon by Improve asset ROI, EVA
members of the organization. Goal congruence is utilization
best achieved if the measures are balanced and
linked to the organization’s strategy. Customer Perspective: defines and selects the
customer and market segments in which the
Balanced measures are balanced between:
a. lag measures vs. lead measures company chooses to compete; the source of the
b. objective measures vs. subjective measures revenue component for the financial objectives
c. financial measures vs. nonfinancial measures Objectives Measures
d. external measures vs. internal measures Core
Increase market Percentage of market
To establish a closer link to strategy, many share
different performance measures are used in the Increase customer Percentage growth,
Balanced Scorecard. retention Percentage of
repeating customers
THE BALANCED SCORECARD Increase customer Number of new
-expresses the complete story of a company’s acquisition customers
strategy through an integrated set of financial Increase customer Ratings from
and nonfinancial measures classified into four satisfaction customer surveys
perspectives Increase customer Customer profitability
profitability
Four Perspective of Performance Measures Performance Value
1. The financial perspective Decrease price Price
2. The customer perspective Decrease post- Post-purchase costs
3. The internal business process perspective purchase costs
4. The learning and growth perspective Improve product Ratings from
functionality customer surveys
Sample Objectives and Measures Improve product Percentage or
Financial Perspective: establishes the long- and quality returns
short-term financial performance objectives
 Increase delivery On-time delivery Throughput Time
reliability percentage, Aging = Manufacturing Cycle Time
schedule = Time from the start of production until the
Improve product Ratings from
goods are shipped
image customer surveys
= Process Time + Inspection Time + Move Time +
Internal Business Process Perspective: Queue Time
processes are the means for creating customer Process Productivity = Total Units / Value-added
and shareholder value; entails the identification Time
of processes needed to achieve customer and Process Quality Yield = Good Units / Total Units
financial objectives; the process value chain is Throughput per hour
made up of three processes: the innovation = Process Productivity x MCE x Process Quality
process, the operations process and the post- Yield
sales process = Good Units Manufactured / Total Processing
Objectives Measures Time
Innovation
Manufacturing Cycle Efficiency
Increase Number of new
number of products/total products R&D = Value-added Time /Throughput Time
new products expenses Waiting Time = Annual Average Number of Orders
Increase Percentage revenue from x Manufacturing Time per order
proprietary proprietary products; Number Note:
products of patents pending
value added time : process time non-value added
Decrease Time to market (from start to
product finish) time : inspection time, move time and queue time
development
cycle time Learning and Growth Perspective: the source of
Operations the capabilities that enable the accomplishment
Increase Quality costs, Output yields, of the other three perspectives’ objectives; has
process Percentage of defective units three major objectives: increasing employee
quality capabilities; increasing motivation, empowerment,
Increase Unit cost trends,
process and alignment; and increasing information systems
Outputs/inputs capabilities
efficiency
Decrease Cycle time and velocity, MCE Objectives Measures
process time Employee Capabilities
Post-sales Service increase Employee satisfaction ratings
Increase First-pass yields Employee turnover percentage
service Employee productivity
quality Hours of training
Increase Cost trends, Outputs/input Motivation and Alignment
service increase Suggestions per employee
efficiency Suggestion implemented per
Decrease Cycle time employee
service time Information Systems Capabilities
increase Percentage of processes with
real-time feedback capabilities

Delivery Cycle Time = Time from ordering up to

the shipment of the goods