Cost Advantage.pptx
- 1. WELCOME TO OUR PRESENTATION BY GROUP - 3
- 2. CHAPTER - 03 Cost Advantage
- 3. Objectives Understand the Cost Advantage and Value Chain To Know About Cost Behavior, Cost Drivers and Cost Dynamics Determining, Gaining and Implementation of Cost Advantage To Know the Steps in Strategic Cost Analysis
- 4. Cost Advantage A company has a cost advantage when it can produce a product or provide a service at a lower cost than its competitors
- 5. Elements of Cost Advantage • Access to low-cost raw materials • Efficient processes and technologies • Low distribution and sales costs
- 6. Price their products the same as their competitors but make more profit because their costs are lower Lower their prices below those charged by competitors to attract more customers and gain market shares Cost Advantage
- 7. The Value Chain and Cost Analysis • The behavior of a firm's costs and its relative cost position stem from the value activities the firm performs in competing in an industry. • Cost advantage results if the firm achieves a lower cumulative cost of performing value activities than its competitors.
- 8. The Value Chain and Cost Analysis Defining the Value Chain for Cost Analysis Determining the Purposes of Cost Analysis Assigning the Cost and Assets First Cut Analysis of Costs
- 9. Cost Behavior Cost behavior is an indicator of how a cost will change in total when there is a change in some activity. It is also the manner in which expenses are impacted by changes in business activity.
- 10. Cost Drivers Interrelationship s Integration Timing Location Economies of Scale Learning The Pattern of Capacity Utilization Linkages
- 11. The Cost of Purchased Inputs • The cost of purchased inputs is an integral part of the cost of a value activity, and the cost drivers described above determine the behavior of input costs. • Purchased inputs divide into purchased operating inputs and purchased assets.
- 12. Segment Cost Behavior The cost analysis at the segment level must often supplement analysis at the business unit level. Identifying important differences in the value activities for different segments is a starting point in segment cost analysis. In practice, however, a business unit usually produces a number of different product varieties and sells them to a number of different buyers . It may also employ a number of different distributions channels.
- 13. Segment Cost Behavior A firm should analyze the costs of those product lines, buyer types, or other portions of its activities that: Have significantly different value chains Appear to have different cost drivers Employ questionable procedures for allocating costs
- 14. Cost Dynamics Cost dynamics refers analysis of cost behavior how the absolute and relative cost of value activities will change over time independent of its strategy. Porter terms this cost dynamics.
- 15. Common Sources Of Cost Dynamics Relative Inflation of Costs Aging Market Adjustment Industry Real Growth Differential Scale Sensitivity Different Learning Rate Differential Technological Change
- 16. Determining the Relative Cost of Competitors • First Step: Determining competitor costs is to identify competitor value chains and how activities are performed by them. • Second Step: Typically improve the accuracy of estimates of competitor’s costs by examining several competitors simultaneously.
- 17. Gaining Cost Advantage Control Cost Drivers Reconfigur e the Value Chain Gaining Cost Advantage
- 18. Controlling Cost Drivers Controlling Scale Controlling Learning Controlling the Effect of Capacity Utilization Controlling Linkages Controlling Interrelationships Controlling Integration Controlling Timing Controlling Location
- 19. Reconfigurin g the Value Chain • A different production process • Differences in automation • Direct sales instead of indirect sales • A new distribution channel • A new raw material • New advertising media
- 20. Sustainability of Cost Advantage Cost advantage is sustainable if there are entry or mobility barriers that prevent competitors from imitating its sources. Some drivers, however, tend to be more sustainable than others: • Economic of scale • Economics of learning • Process, technology & Design • Capacity • Input cost
- 21. Implementati on and Cost Advantage Costs do not go down automatically or by accident. No cost driver works automatically. Factors contribute to a firm's ability to achieve cost leadership. • Training and motivation of employees firm's culture • Adoption of formal cost reduction programs • Constant pursuit of automation • Strong belief in the learning curve
- 22. Pitfalls in Cost Leadership Strategies Exclusive Focus on the Cost of Manufacturing Activities Ignoring Procurement Overlooking Indirect or Small Activities False Perception of Cost Drivers Failure to Exploit Linkages Unwitting Cross Subsidy
- 23. Steps in Strategic Cost Analysis 1. Identify the appropriate value chain and assign costs and assets to it. 2. Diagnose the cost drivers of each value activity and how they interact. 3. Identify competitor value chains, and determine the relative cost of competitors and the sources of cost differences. 4. Ensure that cost reduction efforts do not erode differentiation, or make a conscious choice to do so. 5. Test the cost reduction strategy for sustainability
- 24. THANK YOU