Jerald Jay C. Catacutan.

Stategic Cost Management

BSA-2B. Chapter 7: Review Questions

1. Give the major weakness of each of the three competitive strategies: (1) cost leadership, (2)
differentiation, and (3) focus.

1. Cost Leadership

In cost leadership, a firm sets out to become the low cost producer in its industry. The sources of cost
advantage are varied and depend on the structure of the industry. They may include the pursuit of
economies of scale, proprietary technology, preferential access to raw materials and other factors. A low
cost producer must find and exploit all sources of cost advantage. if a firm can achieve and sustain
overall cost leadership, then it will be an above average performer in its industry, provided it can
command prices at or near the industry average.

2. Differentiation

In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that are
widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as
important, and uniquely positions itself to meet those needs. It is rewarded for its uniqueness with a
premium price.

3. Focus

The generic strategy of focus rests on the choice of a narrow competitive scope within an industry. The
focuser selects a segment or group of segments in the industry and tailors its strategy to serving them to
the exclusion of others.

The focus strategy has two variants.

(a) In cost focus a firm seeks a cost advantage in its target segment, while in

(b) differentiation focus a firm seeks differentiation in its target segment. Both variants of the focus
strategy rest on differences between a focuser's target segment and other segments in the industry. The
target segments must either have buyers with unusual needs or else the production and delivery system
that best serves the target segment must differ from that of other industry segments. Cost focus exploits
differences in cost behaviour in some segments, while differentiation focus exploits the special needs of
buyers in certain segments.

2. What is a balanced Scorecard? What is the primary objective when using a balanced scorecard?

A balanced scorecard is a strategic management performance metric used to identify and improve
various internal business functions and their resulting external outcomes. Balanced scorecards are used
to measure and provide feedback to organizations. Data collection is crucial to providing quantitative
results as managers and executives gather and interpret the information and use it to make better
decisions for the organization. The balanced scorecard can provide information about the company as a
whole when viewing company objectives. An organization may use the balanced scorecard model to
implement strategy mapping to see where value is added within an organization. A company also uses a
balanced scorecard to develop strategic initiatives and strategic objectives.

3. Contrast using the balanced scorecard with using only financial measures of success.

a balanced scorecard evaluates employees on an assortment of quantitative factors, or metrics based on

financial information, and qualitative factors, or those based on nonfinancial information, in several
significant areas. The quantitative or financial measurements tend to emphasize past results, often
based on their financial statements, while the qualitative or nonfinancial measurements center on
current results or activities, with the intent to evaluate activities that will influence future financial
performance.

4. How can an analyst incorporate the industry-market-size factor and the interrelationships between
the growth, price-recovery, and productivity components into a strategic analysis of operating income?

An analyst can incorporate other factors such as the growth in the overall market and reductions in
selling prices resulting from productivity gains into a strategic analysis of operating income. By doing so,
the analyst can attribute the sources of operating income changes to particular factors of interests. For
example, the analyst will combine the operating income effects of strategic price reductions and any
resulting growth with the productivity component to evaluate a company's cost leadership strategy.

5. Why does balanced scorecard differ from company to company?

A company's balanced scorecard differs from company to company because it is based on and supports
each company's strategy. Since each company's strategy is different, their balanced scorecards differ.

6. What is the difference between the delivery cycle time and the throughput time? What four elements
make up the throughput time? Into what two classes can these four elements be placed?

Delivery cycle time is the time when a client issued the order before the finished goods are delivered.
Throughput time is the period from the start of production until the delivery of finished products. Four
components of throughput time include process time, move time, queue time, and inspection time. The
element that adds value is the process time and the rest other elements are a part of the non-value-
added time.

7. Why does the balanced scorecard include financial performance measures as well as measures of how
well internal business processes are doing?

The balanced scorecard is put together to support the organization's strategy, which is used to further
the company's goals. Both of these measures are included in order to fully understand how a business is
doing and how effective their strategy is.
8. If a company has a manufacturing cycle efficiency (MCE) of less than 1, what does it mean? How
would you interpret an MCE of 0.40?

An MCE of less than 1 means that the production process includes non-value added time. An MCE of
0.40 means that 40% of throughput time consists of actual processing, while the other 60% consists of
moving, inspection, and other non-value-added activities.