ater if RES Opener o Evaluating Company © i i Vi Chains regic Cost Anabysis. and Value. 1G es Ba must pi ever alert (0 HOW their vosts compare with rivals’. While every Gn top of what its own costs are and how Ee $10 stay ae al cost analysis oes a step further to explore Row fa nga ng, rae Ct eo firm's cost position they might Be ange rivals, Strategic FO 2 alysis focuses costs compare f oe compan how a fetive OR AVA consists of a collection of activities undertaken in the” Cor Every CO ae imarketing, delivering, and supporting its product OF Ee stack up signing, producin : ; ‘ course of esr Tics give Hise to costs, The combined costs of all these “AF~Lesin he unit cotice. Each of these sien efine the company’s intemal cost structure. Further, the cost of cach a= ¢osis of key cor aonuibues 19 whether the company’s overall cost position relative (0 rivals 18 pexitors ately by tv Morunfavorable. The task of strategic cost analysis isto compare a company’s ~ ara, thereby costs activity by activity against the casts of key rivals and to learn which internal ac- pinpoinung wbich tivities are a source of cost advantage or disadvantage. A company’s relative cost po- internal activities sition is a function of how the overall costs of the activities it performs in conducting . are @ source: of business compare to the overall costs of the activities performed by rivals. cost advantage OF disadvantage. ) The Concept of a Company Value Chaigh Tre primary analytical tool of strategic cost analysis SAW in identifying the separie activities, functions, and business processes that are performed in designing, producing. marketing, deliv- $f ering, and supporting a product or service. see ‘Of value-creating activities it takes to provide a product of service starts #i1h raw materials supply and continues on through paris and components production. manufacturing and assembly, wholesale dis tribution, and retailing to the end user of the product or service. A company’s value chain shows the linked set of activities and functions it per- iat create value Yor | forms intemnally (see Figure 4.2). The value chain includes a profit margin because a. “Ustomers and the | ious activ markup over the cost of performing the firm’s value-creating activites is customarily patt of the price (or total cost) borne by buyers—creating value that exceeds the cost (of doing so is a fundamental objective of business. Disaggregating a company’s oper- | 7 ations into strategically relevant activities and business processes exposes the major el- ‘callaboraling wh strategic partners, and other “overhead” functions ‘Sour: Adapted liom Michael E. Poner, Compelive Advantage (New York: The Free Press, 1985) pp 37-43. : installation, spare 3s relating to product R&D, process ment, {elecemmunications ind Systems Development—Activities, costs, and asse id development of computerized ‘equipment design, computer software develop new database capabilities, an the recruitment, hiring, training activi alue chains of ti- s the task of using to execute its strategy, and the underlying economies of the selves.” Because these ftcirs differ from company to company. the vi ‘al companies sometimes fer substantally—-a condition that complicate assessing Fivalswative east positions, Far instance. competing companies my sit degrees of vertical integration, Comparing the valu el ted insta partially integrated rival roquires adjusting for differences 1n scope < ain for a fully inte; Sarna with ComSeanrrChapter | Evaloating Company Resouces 296 Competitive Capabilities , for a manufacturer that makes all of its nternal costs of a producer that 4, Clearly the internal costs ‘and only performs &3-_ activities performe ‘own parts and components will Be greater ‘ha the i aps the needed parts and components from outside suppliers sembly operations, a eoise, there is legitimate reason to expect va that is pursuing a Tow-cosvIow-Pric igh end of the market with a product that has Stim features. Inthe case ofthe low-cost frm, the Foes of certain activities along serptapany’s valve chain should indeed be relatively ow, whereas the high-end firm nay understandably be spending relatively more (0 perform those activities that create the added quality and extra features. added aes, cost and price differences among rival companies have their origins sn acnics performed by suppliers or by forward channe! allies involved in getting the product io end users. Supplies or forward channe! Slies may have excessively high cost eierec or profit margins that jeopardize a company’s eo ‘competitiveness even thouzh its costs for internally performed activities ar competitive. For example, when Jerermining Michelin's cost competitiveness vis-2-Vis ‘Goodyear and Bridgestone in supplying replacement tires (0 vehicle owners, we Mave 1 Took at more than whether Mechelin's tire manufacturing costs are above or below ‘Goodyear’s and Bridgestone’s. Tan cay that a buyer has to pay $400 for a set of Michelin &ere and only $350 for @ comparable set of Goodyear or Bridgestone tires; Michelin's $50 price disadvantage in See placement ire marketplace can stem not only from high" ‘manufactaring costs (Fe flecting, perhaps, the added costs of Michelin's strategit ‘efforts to build a berter-quality aera mnore performance features) but also from (1) differsneet ‘what the three tire makers pay their suppliers for materials and tire-Wgalsn components and (2) differences nthe operating efficiencies, costs, and markups Of ‘Michelin’s wholesaleretail dealer aan crersus those of Goodyear and Bridgestone. Thus, determarioe whether a com- pany's prices and costs are competitive from an ‘end user’s standpoint requires looking path antviies and costs of competitively relevant suppliers and forward allies, as well gs the costs of internally performed activities. ‘The Value Chain System for an Entire Industry 6 the tire industry ex- ample makes clear, a company's value chain is ‘embedded in a larger system of activ- ities that includes the valve chains of its vp stream suppliers and downstream od in getting its product or service 10 end users. ue chain and cost differences be- ‘owen a company ‘strategy and a rival that is po- sitioned on the bi prestige quality and a ————— "A company's cost ‘competitiveness 4 3 Accurately pends not only 0 ‘customers or allies engag: ‘assessing a company's competitiveness in end-use markets requires that company aostagers understand the entire value chain system for delivering @ Droduct or sep, Beem RET vice to end users, not just the company’s own value chain. At the very Teast, this "ally performed tier and forward Channel allies (fany— 10 ch dade value chain) but means considering the value chains of supp! as shown in Figure 4.3. ‘Suppliers’ value chai costs in creating and del chain; the cost and quality of ferentiation capabilites. Anything a company can do to reduce improve suppliers’ effectiveness can enhance its own ‘competitivenes: > reason Panes collaboratively with suppliers, nel vale chains ae relevant because (1) the costs ‘and margins of downstream companies ito partof the price the end user pays and (2) the activities iers perform activities and incur Son 2 4 used in a company’s own ValU€ suppliers and for company’s own cost and/or dif- ward channel alie its Suppliers” costs or a powerful jin are relevant because supp! ivering the purchased inputs these inputs influence a tiie ‘Scanned wth CamScanet4 igure 4.3 Representative Value Chain for an Entire Industry Sigs P Value Chains Distribution Related Value Chains Company Supplier Related Value Chain Valve Chains ee aed Perey eee Relat oneness) Activities, Costs, JJ Forward Channet Daal Pe Errne Ce Pr ‘Strategic er eed Source. Adapted trom Michael forward should work closel: chains in ways th h may be able to im t benef mpact both its chains vary b try and by conn ue chal t pulp mills, papermaking f , ; ) differ fron iy, wholesale d as ey, wolesale distribution, retailing) differs irom that for the von ni (programming. disk Joading. marketing. distribution. eet i. Marketing. distribulton), fy Sapa tulautets depends heavily onthe sciviies of whéleccre sccy, ©. Paltroom. and Bates in wining sates to homebuilders andsiow sc nts and bile and 6 yours \ Deters. Acgcuning v Dae fin Yate Chin Analyte 4g or iris SRRIRN® the chusering of appt ra RES. Mi hc (m0 A Niemi 4 ODE NOC SegaPszations ster wo a ti *y 1 Tetelities es _ ompeiive Copabil Company Evoluating at i ctly to the é Hing directly destiny by Se 23\ties and engines consis OFF as most i Cees. A hot 's 1) gasoline ywipment ‘and oul dI Binie- sie ls hah costs deal with ivities and costs are in ice, conventions and mee! Aessoive ecavid ing and room service ‘activities and costs ' and housekeeping, ing firm's most important iting and training 2 deg. bl DE UE es manage ieee at Doritos acme peal sf). Oa ale vind marketing ‘are dominant highly a ster. Sales a fe: raza bat comparatively insignificant at Blocks at interstate gas pipeline companies iti but only minor activi! are illustrative, not aves at Coe Cecil thse in Figures 42 and 4-3 are last sequently, generic value chain 4 %5 circus . hol and ay equi adaptation tot particular company ing the Data for Strategic Cost Analysis me pastes chain are identified, the next step in strategic cost analysis in " breaking down a firm's departmental cost accounting data into the costs of performing specific activties."The appropriate degree of disaggregation depends on the econom- ics ofthe activites end how valuable itis to develop cross-company cost comparisons for nacrowly defined activities as opposed to broadly defined activities. A good guide- line is to develop separate cost estimates for activities having different economics and for activities representing a significant or growing proportion of cost." Trasitional accounting identifies costs according to broad categories of ex- enses—wiges and slates, employee benefits, supplies, travel, depreciation, R&D, ane het fixed charges. Actvin-based costing entails defining expense categories lysis Once the major ele- volves sctviy-hesed costing hve adopted this accountng approa derstand in costs of activities all along the inusty value chai; Soe aie ue ormed in the competitively relevant portions of supp ener, also have tobe developed. Pollen‘ and customers’ value chains Avis rivals makes activity. peti sed cost or don vi tion Capsule ng a val S Positi . "a Sos agmatine a naa oer lar firm's cost postion recation of val music CD industry, compares with the fae !* '.expose how a pani 8 Of its rivals, eS is needed ‘counting Data fr Value Chant ement Wp 62-79 mage ONE Of Value i 5 innate ee 7 And Chap AM Sl Ces, seg " sat dncetson of scvity bay BET and Moms, “ae lak the Right Decision” ps 8 AcOunt 7D 96-101, cn. See Coon Thomas G Con 84 Govindaryat Kan, “Measun and Sn 73 da a EG . Srate pe MESSE Costs Rig "Sh a Govtean ee egret men he : i Co ABC Benet. Shaper ard Business snetemens p62,