Chapter 4

CHAPTER
4
DEVELOPING A COMPETITIVE
STRATEGY AND CONTEMPORARY
COST MANAGEMENT TECHNIQUES
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EXPECTED LEARNING OUTCOMES
After studying this chapter, you should be able to…
1. Understand the basic approach of how a firm’s competitive strategy is developed
2. Explain the strategic measures of success, financial and nonfinancial factors
3. Describe the critical success factors in a business firm and how they can be measured
4. Explain the consequences of lack of strategic information
5. Describe the two basic competitive strategies, namely,

a. Cost Leadership
b. Product Differentiation
6. Understand and describe the contemporary cost management techniques such as

a. Total Quality Management
b. Just-in-Time Production System
c. Process Reengineering
d. Benchmarking
e. Mass Customization
f. Balanced Scorecard
g. Activity-based Costing and Management
h. Theory of Constraints
i. Life Cycle Costing
j. Target Costing
k. Computer-Aided Design and Manufacturing
l. Automation
m. E-Commerce
n. The Value Chain
DEVELOPING A COMPETITIVE STRATEGY
A strategy is a set of policies, procedures and approaches to business that produce long-term
success.
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DEVELOPING A COMPETITIVE STRATEGY;

CONTEMPORARY COST MANAGEMENT
TECHNIQUES
Finding a strategy begins with determining the purpose and long-range direction or on in other
words, the mission of the company. The mission is developed into specific performance
objectives which are then implemented by specific corporate or company’s strategies, that is,
specific actions to achieve the objectives that will fulfill the mission. A form succeeds by
implementing a strategy.
Strategy specifies how an organization matches its own capabilities with the opportunities in the
market place to accomplish its objectives. In other words, strategy describes how a compete will
compete and the opportunities its employee should seek and pursue. Companies follow one of
two broad strategies. Some companies such as Jollibee, Pure Gold and Cebu Pacific Airline
compete on the basis of providing a quality product or service at low prices. This is also known
as “Cost Leadership” strategy. Other Companies such as Rustan’s Department Store and BGC
Shangri-La Hotel compete on their ability to offer unique products or services that are often
process higher than the products or services of competitors. This is known as “Product
Differentiation” strategy.
Deciding between these strategies is a big part of what managers do. Management accountants
work closely with managers in formulating strategy by providing information about the sources
of competitive advantage – for example, the cost, productivity, or efficiency advantage of their
company relative to competitors or the premium prices a company can charge relative to the cost
of adding features that make its products or services distinctive. The management accountant
also helps formulate a strategy by answering questions such as:
 Who are our most important customers?

 How sensitive are their purchases to price, quality, and service?
 Who are our most important suppliers?
 What substitute products exists in the marketplace, and how do they differ from our
product in terms of price and quality?
 Is the industry demand growing or shrinking?
 Is there overcapacity?
Strategic Cost management is often used to describe Cost Management that specifically focuses
on strategic issues such as these.
STRATEGIC MEASURES OF SUCCESS

Developing a Competitive Strategy; Contemporary Cost Management Techniques 71
Firms use cost management to support their strategic goals. The strategic cost management
system develops strategic information, including both financial and non-financial information.
Financial performance measures include among others

a. growth in sales and earnings
b. cash flows
c. stock price
They show the impact of the firm’s policies and procedures in the firm’s current financial
position and therefore, its current return to the shareholders.
Non-financial measures of operation include among others

a. market share
b. product quality
c. customer satisfaction
d. growth opportunities
The nonfinancial actors show the firm’s current and potential competitive position as measured
from three additional perspective, namely:
1. the customer
2. internal business process and
3. innovation and learning
Strategic financial and nonfinancial measures of success are also commonly called Critical
Success Factors (CSFs)
Figure 4-1 shows the Financial and Nonfinancial Measures of Success (Critical Success Factors)
Figure 4-1: Financial and Nonfinancial Measures of Success or Critical Success Factors and
How to Measures CSF
Critical Success Factors How to measure CSF
Financial Measures of Success

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Sales Level of sales in critical product groups, sales

trend, percent of sales from new products, sales
forecast accuracy
Profitability Earnings from operations, earnings trend, dividend
growth
Liquidity Cash flow, trend in cash flow, interest coverage,
asset turnover, inventory turnover, receivables
turnover, credit ratings
Market Value Share price
Non-Financial Measures of Success Customer Factors
Customer satisfaction Customer returns and complaints, customer survey
Dealer and distributor Coverage and strength of dealer and distributor
channel relationships; e.g., number of dealers per
state or region
Marketing and selling Trends in sales performance, training, market
research activities; measured in hours or peso
Timeliness of delivery On-time delivery performance, time from order to
customer receipt
Quality Customer complaints, warranty expense
Internal Business Process
Quality Number of defects, number of returns, customer
survey, amount of scrap, amount of rework, field
service reports, warranty claims, vendor quality
defects
Productivity Cycle time (from raw materials to finished product);
labor efficiency; machine efficiency; amount of
waste, rework, and scrap
Flexibility Setup time, cycle time
Equipment readiness Downtime, operator experience, machine capacity,
maintenance activities
Safety Number or accidents, effects and accidents
Learning and Innovation
Product innovation Number of design changes number of new patents
or copyrights, skills or research and development
staff
Timeliness of new product Number of days over or under the announced ship
date
Skill development Number of training hours, amount of skill
performance improvement
Employee turnover, number of complaints,
Employee morale employee survey

Rate of turnover, training, experience, adaptability,
Competence financial and operating performance measures
Other factors
Government relations Number of violations, community service activities
Without strategic information, the firm is likely to stray from its competitive course, to make
strategically wrong manufacturing and marketing decisions, to choose the wrong products or the
wrong customers. Some of the consequences of a lack of strategic information are shown in
Figure 4-2.
Figure 4-2: Consequences of Lack of Strategic Information
 Decision making based on intuition

 Lack of clarity about direction and goals
 Lack of clear and favorable perception of the firm by customers and suppliers
 Incorrect investment decisions; choosing products, markets or manufacturing processes
inconsistent with strategic goals
 Inability to effectively benchmark competitors, resulting in lack of knowledge about more effective
competitive strategies
 Failure to identify most profitable products, customer and markets
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COMPETITIVE STRATEGIES
For a firm to sustain a competitive position, it must purposefully or as result of market forces
arrive at one of the two competitive strategies, namely
Cost Leadership and Product Differentiation
Cost Leadership
This is a competitive strategy in which a firm succeeds in producing products or services at the
lowest cost in the industry. A firm that is a cost leader makes sustainable profits at lower prices,
thereby limiting the growth of competitions in the industry through its success in price wars and
undermining the profitability of competitors which must meet the firm’s low price.
Product Differentiation
The differentiation strategy is implemented by creating a perception among consumers that the
product or service is unique in some important way, usually by being of higher quality, features
or innovation. This perception allows the firm to charge higher prices and outperform the
competition in profits without reducing cost significantly. Most industries, including automobile,
consumer electronics, and industrial equipment, have differentiated firms. The appeal of
differentiation is especially strong for product lines which the perception of quality of
differentiation is important, as in cosmetics, jewelry and automobiles. Tiffany, Roles, Ferrari and
BMW are good examples of forms that emphasize differentiation.
Distinctive Aspects of the Two Competitive Strategies

Aspect Cost Leadership Differentiation
Strategic Target Broad cross section of the Focused section of the market
market
Basis of competitive Lowest cost in the industry Unique product or service
advantage
Product line Limited selection Wide variety, differentiating
features
Production emphasis Lowest possible cost with high Innovation in differentiating
quality essential product products
features
Markets emphasis Low price Premium price and innovative
differentiating features
Looking more closely at differentiated firms, the keys CSFs and execution issues are in marketing and
product development — developing customer loyalty and brand recognition, emphasizing superior and
unique products, and developing and using detailed and timely information about customer needs and
behavior. This is where the marketing and product development within the firm provide leadership and
the management accountants support these efforts by gathering, analyzing, and reporting the relevant
information.
Other Strategic Issues
A firm succeeds by adopting and effectively implementing one of the strategies explained earlier.
Recognize that although one strategy is generally dominant, a firm is most likely to work hard at
process improvement throughout the firm, whether cost leader or differentiator, and on occasion
to employ both of the strategies at the same time. However, a firm following both strategies is
likely to succeed only if it achieves one of them significantly. A firm that does not achieve at
least one strategy is not likely to be successful. This situation is what Michael calls "getting stuck
in the middle". A firm that is stuck in the middle is not able to sustain a competitive advantage.
For example, giant retailer Makati Supermarket been stuck in the middle between trying to
compete with Pure Gold on cost and price, and with style conscious target on differentiation.
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CONTEMPORARY COST MANAGEMENT TECHNIQUES
Managers commonly use the following tools to implement the firm's broad and to facilitate the
achievement of success on critical success factors: just-in-time (JIT), total quality management,
process reengineering, benchmarking, mass customization, balanced scorecard, activity-based
costing and management, theory of constraints (TOC), life cycle costing, target costing,
computer-aided design and manufacturing, automation, e-commerce and the value chain and
supply-chain analysis.
The basic concepts of these cost management techniques are discussed in the succeeding section:
a. Total Quality Management

To survive in an increasingly competitive environment, firms realizes that they must
produce high-quality products. As a result, an increasing number of companies have
instituted total quality management programs to ensure their products are of the highest
quality and that production processes efficient.
Total quality management (TQM) is a technique in which management develops policies
and practices to ensure that the firm's products and services exceed customers'
expectations.
Currently, there is no generally agreed upon "perfect" way to institute a TQM program.
But most companies with TQM develop a company that stresses listening to the needs of
customers, making products right the first time, reducing defective products that must be
reworked, and encouraging workers to continuously improve their production process.
That is why some TQM programs are referred to as continuous quality improvement
programs.
TQM affects product costing by reducing the need to track the cost of scrap and rework
related to each job. If TQM is able to reduce these costs to a very low level, the benefit of
tracking the costs is unlikely to exceed the cost to the accounting system.
Total Quality Management (TQM) is a formal effort to improve quality throughout an
organization's value chain. The two major characteristic TQM are
(1) a focus on serving customers, and
(2) systematic problem-solving using teams made up of front-line workers.
Chapter 6 includes more detailed discussion of the TOM.
b. Just-in-Time (JIT)
Just-in-Time (JIT) is the philosophy that activities are undertaken only as needed or
demanded. JIT is a production system also known as pull-it-through approach, in which
materials are purchased and units are produced only as needed to meet actual customer
demand. In a JIT system, inventories are reduced to the minimum and in some cases,
zero.
Just-in-Time (JIT) production is a system in which each component on a production line

is produced immediately as needed by the next step in the production line. In a JIT
production line, manufacturing activity at any particular workstation is prompted by the
need for that station's output at the following station. Demand triggers each step of the
production process, starting with customer demand for a finished product at one end of
the process and working all the way back to the demand for direct materials at the other
end of the process. In this way, demand pulls a product through the production line. The
demand-pull feature of JIT production systems achieves close coordination among work
centers. It smoothes the flow of goods, despite low quantities of inventory.
Financial Benefits of JIT
JIT tends to focus broadly on the control of total manufacturing costs instead of
individual costs such as direct manufacturing labor. For example, idle time may rise
because production lines are starved for materials more frequently than before.
Nevertheless, many manufacturing costs will decline. JIT can provide many financial
benefits, including
1. Lower investment in inventories.

2. Reductions in carrying and handling costs of inventories.
3. Reductions in risk of obsolescence of inventories.
4. Lower investment in plant space for inventories and production.
5. Reductions in setup costs and total manufacturing costs.
6. Reduction in costs of waste and spoilage as a result improves quality.
7. Higher revenues as a result of responding faster to customers.
8. Reductions in paperwork.
Major Features of JIT Production System

There are five main features in a JIT production system:
1. Production is organized in manufacturing cells, a grouping of all different types of
equipment used to manufacture a given product.
2. Workers are trained to be multiskilled so that they are capable of performing a variety
of operations and tasks.
3. Total quality management is aggressively pursued to defects.
4. Emphasis is placed on reducing setup time, which is the time require to get equipment,
tools and materials ready to start the production of a component or product, and
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manufacturing lead time, which is time from when an order is ready to start on the
production line to when it becomes a finished good.
5. Suppliers are carefully selected to obtain delivery of quality-tested parts in a timely
manner.
A more detailed discussion of JIT Product System is covered in Chapter 6.
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c. Process Reengineering
Reengineering is a process for creating competitive advantage in which a firm

reorganizes its operating and management functions. often with the result that jobs are
modified, combined, or eliminated. It has been defined as the "fundamental rethinking
and radical redesign of business processes to achieve dramatic improvements in critical,
contemporary measures of performance, such as cost, quality, service, and speed.
Process reengineering, a more radical approach to improvement than TQM, is an

approach where a business process is diagrammed in detail, questioned and then
completely redesigned in order to eliminate unnecessary steps, to reduce opportunities for
errors and to reduce costs. A business process is any series of steps that are followed in
order to carry out some task in a business.
The main objective of this approach IS the simplification and elimination of wasted effort
and the central idea is that all activities that do not add value to product or service should
be eliminated. In its most simplified version. the steps used in process reengineering are
1. A business process is diagrammed in detail.

2. Every step in the business process must be analyzed and justified.
3. The process is redesigned to include only those steps that make the product or
service more valuable.
This process can yield the following anticipated results:

1. Process is simplified
2. Process is completed in less time
3. Costs are reduced, and
4. Opportunities for errors are reduced
Process reengineering has one basic recurrent problem, that is – employee resistance. As
with other improvement projects, employees fear loss of jobs which may lead to lost
morale and failure to improve the bottom line (i.e., profits). For the process to prosper
and succeeds employees must be convinced that the end result of the improvement will be
more secure, rather than less secure jobs. They can be made to understand that improving
the processes, the company can generate more business, produce a better product at lower
cost and will have the competitive strength to prosper.
d. Benchmarking
Benchmarking is a process by which a firm
 determines its critical success factors
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 studies the best practices of other firms (or other units within a firm) for achieving
these critical success factors, and
 then implements improvements in the firm's processes to match or beat the
performance of those competitors.
Today benchmarking efforts are facilitated by cooperative networks of noncompeting

firms that exchange benchmarking information.
e. Mass Customization
Many manufacturing and service firms increasingly find that customers expect products
and services to be developed for each customer's unique needs. And many firms have
been successful with a strategy that targets customer's unique needs.
Mass customization is a management technique in which marketing and production

processes are designed to handle the increased variety that results from delivering
customized products and services to customers.
The growth of mass customization is in effect another indication of the increased

attention given to satisfying the customer.
f. Balanced Scorecard
The balanced scorecard is an accounting report that includes the firm’s critical success
factors in four areas
(a) financial performance,

(b) customer satisfaction.
(c) internal business process, and
(d) innovation and learning.
The concept of balance captions the intent of broad coverage, financial and nonfinancial
of all the factors that contribute to the success of the firm in achieving its strategic goals.
The use of the balanced scorecard is thus a critical ingredient of the overall approach that
firms take to become and remain competitive.
This is discussed in more details in Chapter 7.
g. Activity-based Costing and Management

Activity analysis is used to develop a detailed description of the specific activities
performed in the operation of the firm. Many firms have found that they can improve
planning, product costing, operational control, and management control by using activity
analysis to develop a detailed description of the specific activities performed in the firm's
operations. The activity analysis provides the basis for activity-based costing and
activity-based management. Activity-based costing (ABC) is used to improve the
accuracy of cost analysis by improving the tracing of costs to products or to individual
customers. Activity-based management (ABM) uses activity analysis to improve
operational control and management control. ABC and ABM are key strategic tools for
many firms, especially those with complex operations, or great diversity of products.
h. Theory of Constraints (TOC)
The Theory of Constraints is a sequential process of identifying and removing constraints

in a system.
The Theory of Constraints emphasizes the importance of managing the organization's

constraints or barriers that hinder or impede progress toward an objective. Since the
constraint is whatever is holding back the organization, improvement efforts usually must
be focused on the constraint to be really effective.
The basic sequential steps followed in applying TOC are

1. Analyze all the factors of production (materials, labor, facilities, methods, etc.)
required in the production chain.
2. Identify the weakest link, which is the constraint.
3. Focus improvement efforts on strengthening the weakest link.
4. If improvement efforts are successful, eventually the weakest link will improve
to the point where it is no longer the weakest link.
5. At this point, a new weakest link (new constraint) must be identified and
improvement efforts must be shifted over that link.
The Theory of Constraints approach is a perfect complement to Total Quality

Management and Process Reengineering - it focuses improvement efforts where they are
likely to be most effective.
TOC is discussed more extensively in Chapter 8.
i. Life Cycle Costing
Life-cycle costing is a management technique to identify and monitor the costs of a

product throughout its lifecycle. It consists of all steps from product design and purchase
of raw material to delivery of and service of the finished product. The steps include
(l) research and development
(2) product design, including prototyping, target costing and testing
(3) manufacturing, inspecting, packaging and warehousing
(4) marketing, promotion and distribution
(5) sales and service.
Cost management traditionally has focused only on costs incurred up to the third step
manufacturing. Management accountants now strategically manage the product's full life
cycle of costs, including upstream and downstream costs as well as manufacturing costs.
j. Target Costing
Target costing involves the determination of the desired cost for a product or the basis of
a given competitive price so that the product will earn a desired profit. The basic
relationship that is observed in this approach is
Target cost = Market demand price – Desired profit
The entity using target costing must often adopt strict cost-reduction measures to meet the
market price and remain profitable. This is a common strategic approach used by
intensely competitive industries where even small price differences attract consumers to
the lower-priced product.
k. Computer-Aided Design and Manufacturing
More companies are using computer-aided design (CAD) and computer-aided

manufacturing (CAM) to respond to changing consumer tastes more quickly. These
innovations allow companies to significantly reduce the time necessary to bring their
products from the design process to distribution stage.
Computer-aided design is the use of computers in product development, analysis, and

design modification to improve the quality and performance of the product. Computer-
aided manufacturing (CAM) is the use of the computers to plan, implement, and control
production.
l. Automation
Automation involves and requires a relatively large investment in computers, computer

programming, machines, and equipment. Many firms add automation gradually, one
process at a time. To improve efficiency and effectiveness continuously, firms must
integrate people and equipment into the smoothly operating teams that have become a
vital part of manufacturing strategy. Flexible manufacturing systems (FMS) and
computer-integrated manufacturing (CIM) are two integration approaches. A flexible
manufacturing system (FMS) is a computerized network of automated equipment that
produces one or more groups of parts or variations of a product in a flexible manner. It

uses robots and
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computer-controlled materials-handling systems to link several stand-alone, computer-

controlled machines in switching from one production run to another.
Computer-integrated manufacturing (CIM) is a manufacturing system that totally

integrates all office and factory functions within a company via a computer-based
information network to allow bour-by-hour manufacturing management.
The major characteristics of modern manufacturing companies that are adopting FMS and
CIM are production of high-quality products and services, low inventories, high degrees
of automation, quick cycle time, increased flexibility, and advanced information
technology. These innovations shift the focus from large production volumes necessary to
absorb fixed overhead to a new emphasis on marketing efforts, engineering, and product
design.
m. E-Commerce
A number of. internet-based companies have emerged and been proven successful in last
decade. This E-Commerce business model adopted by Amazon.com and eBay has also
attracted many investors to pursue the use of Internet in conducting business. Established
companies will undoubtedly continue to expand into cyberspace — both for business-to-
business transactions and for retailing. The Internet has important advantages over more
conventional marketplaces for some kinds of transaction such as mortgage banking. It is
also very likely that a blockbuster business may be built around the concept of selling
low-value, low-margin and bulky items like groceries over the Internet.
n. The Value Chain
Value chain refers to the sequence of business functions in which usefulness is added to
the products or services of a company. The term value refers to the increase in the
usefulness of the product or service and a result its value to the customer.
The value chain is an analysis tool that firms use to identify the specific steps required to
provide a product or service to the customer. The key idea of this concept is that the firm
studies each step in its operation to determine how each activity contributes to the firm's
competitiveness and profits.
Analyzing the firm's value chain helps management discover

 which steps or activities are not competitive
 where costs can be reduced, or
 which activity should be outsourced, and
 how to increase value for the customer at one or more of the steps of the value
chain.
When properly implemented, these approaches can (a) enhance quality, (b) reduce cost, (c)
increase output, and (d) eliminate delays in responding to customers. These techniques are
introduced here and most are covered more fully in later Chapters.
Internal value chain is the set of activities required to design, develop, produce, market and
deliver products or services to customers, If customer values are emphasized managers are
forced to determine which activities in the value chain are important to customers, A
management accounting system should track information about a wide variety of activities than
span the internal value chain.
Illustrative Case 4-1: Value Chain Analysis
Jack Reyes, a consultant for the Red Archer basketball team, has been asked to complete a value-
chain analysis of the franchise with a particular focus on comparison with a nearby competing
team, the Roaring Lions. Jack has been able to collect selected cost data, as shown below, for
each of the six steps in the value chain. Single-ticket prices range from P45.00 to P80 and
average paying attendance is approximately 2,200 for Red Archers and 5,000 Roaring Lions.
Average Cost per Person and Scheduled Games
Red Archer Steps in the Value Chain Roaring Lions

P. 45 Advertising and general promotion expenses P.50
.28 Ticket sales: local sporting goods stores and at the .25
ball park
.65 Ballpark operations .80
.23 Management compensation .18
.95 Players’ salaries 1.05
.20 Game-day operations, special entertainment, and .65
game-day promotions
P2.76 Total cost P3.43
Required:
Develop an analysis of the value chain to help Jack better understand the nature of the
competition between the Archers and the Lions, and to identify opportunities for adding value
and/or cost reduction at each step.
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Illustrative Case 4-1 – Analysis of the Value Chain
The cost figures Jack has assembled suggest that the two team's operations are generally quite
similar, as one would expect in basketball. However, an important difference is the amount that
the Lions team spends on game-day operations — more than three times than that of the Red
Archers. That difference has, in part, built a loyal set of fans in Lions, where gate receipts
average more than twice that of Archers (P285,000 versus P 123,500). It happens that the Lions
have found an effective way to compete — by drawing attendance to special game-day events
and promotions.
To begin to compete more effectively and profitability, Archers might consider additional value-
added services, such as game-day activities similar to those offered in Lions. While Archers costs
per person are somewhat lower than Lion's, the cost savings are not enough to offset the loss in
revenues.
On the cost side, the comparison with Lions shows little immediate promise for cost reduction;
Archer spends on the average less than Lions in every category except management
compensation. Perhaps this is a further indication that instead of reducing costs, Archer should
spend more on fan development. The next step in Jack's analysis might be survey of Archer fans
to determine the level of satisfaction and to identify desired services that are not currently
provided.
REVIEW QUESTIONS
Questions
1. Identify and explain the two types of competitive strategy.
2. Identify three or four well-known firms that succeed through cost leadership.
3. Identify three or four well-known firms that succeed through product differentiation.
4. Explain the process of identifying a sustainable competitive advantage for a firm.
5. What is the meaning of "getting stuck in the middle" in the context of competitive
strategy, and how does the situation arise?
6. What is the role of the cost manager regarding nonfinancial performance measures such
as delivery speed and customer satisfaction?
7. Explain the difference between short-term and long-term performance measures and give
two or three examples of each.
8. What is a critical success factor, and what is its role in strategic management and in cost
management?
9. Identify four or five potential critical success factors for a small auto-repair shop.
10. What is a balanced scorecard? What is the primary objective when using a balanced
scorecard?
11. Name the ten contemporary management techniques and describe each briefly.
12. How do managers implement strategy?
13. What should managers do to compete effectively?
14. How do companies add value?
15. What does the phrase "what gets measured gets done" mean? Provide an example of a
negative consequence for an organization if this phrase is taken literally
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16. What are some new measures of performance that management accountants are
beginning to consider as part of their domain?
17. Is customer satisfaction a qualitative or a quantitative measure of performance? Or, is it a

combination of both measures?
18. Define competitive benchmarking and continuous improvement.
19. Define value-added and nonvalue-added activities. Which of the following would be
value-added for an automotive manufacturer? Nonvalue-added?
a. painting automobiles
b. moving auto parts from the warehouse to the plant
c. inspection of final product
d. assembling the engines
e. costs to store finished goods
f. costs to store raw materials
g. production of bumpers
h. production of headlights
i. inspection of intermediate product
j. production of spark plugs for automobile
Exercises
Exercise 1 (Strategy, Competitive Advantage)
In the mid-1970s a large retailer of auto parts, Best Parts, Inc. (BPI), was looking for
ways to invest an accumulation of excess cash. BPI’s success was built on a carefully
developed inventory control system that guaranteed a customer would be able to purchase
a desired part 99m percent of the time on demand, and the remaining 1 percent of the
time within one business day. The speed and quality of service set BPI apart from other
parts dealers, and the business continued to grow.
On the advice of close friends and consultants, the owner and CEO of BPI decided to
invest a significant portion of the excess cash in small chain of gift and craft stores. The
stores would be placed in shopping malls.
Required:
Determine the competitive advantage (cost leadership, or differentiation) of BPI in the

auto-parts business. Assess how this competitive advantage would or would not facilitate
success in the new venture.
Exercise 2 (Strategy, Contemporary Management Techniques)
One of the large auto manufacturers in the 1970s developed a sport version of its family
sedan. The new version was equipped with a small V-8 engine and other performance
improvements. The car was called the Pirouette, because of its graceful appearance and
performance. Unfortunately, there was a difficulty in servicing the vehicle. The engine
was too large for the space available, and it had to be moved slightly on the engine
mounts in order for one of the spark plugs to be changed.
Required:
Comment on the strategic competitive advantage of the Pirouette. What type of

management technique was likely used in its design? What type of design approach
should have been used?
Exercise 3 (Value Chain Analysis)
Ram Radio manufactures yacht radios, navigational equipment and depth sounding and
related equipment from a small plant near MNR-North, Tuguegarao City. One of Ram’s
most popular products, making up 40 percent of its revenues and 35 percent of its profits,
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is a marine radio, model VF4500, which is installed on many of the new large boats
produced in the Northern Luzon. Average production and sales are 500 units per month.
Ram has achieved its success in the market though excellent customer service and
product reliability. The manufacturing process consist primarily of assembly of
components purchased from various electronics forms, plus a small amount of
metalworking and finishing. The manufacturing operations cost P110 per unit. The
purchased parts cost Ram P250, of which P130 is for parts that Ram could manufacture
in its existing facility for P80 in materials for each unit, plus an investment in labor and
equipment that would cost P35,000 per month.
Ram is considering outsourcing to another MNR firm, Basher Enterprises, the marketing,
distribution and servicing for its units. This would save Ram P125,000 in monthly
materials and labor costs. Yje cost of the contract would be P105 per radio.
Required:
1. Prepare a value-chain analysis for Ram to assist in the decision whether to purchase or
manufacture the parts, and whether to contract out the marketing, distribution, and
servicing of the units.
2. Should Ram (a) continue to purchase the parts or manufacture them and (b) continue
to provide the marketing, distribution and service or outsource this activity to Basher?
Explain your answer.
Multiple Choice
1. Well-implemented just-in-time production and purchasing techniques

a. result in large stockpiles of inventory to keep production running.
b. strengthen a company' ability to compete in the marketplace.
c. increase a reliance on long-term consumer forecasts.
d. reduce a company's competitive edge.
2. Computer-integrated manufacturing (CIM) plants allow management to do all EXCEPT

a. create brand recognition.
b. diagnose the reason for a defect.
c. access timely and accurate information reading production costs.
d. respond faster to changes in customer preferences.
3. ___________ is/are when a firm compares itself with the best practice of competitors or
other comparable organizations.
a. Value chain c. Key success factors
b. Supply chain d. Benchmarking
4. R&D, production and customer service are business functions that are all included as of
the value chain.
a. the value chain. c. marketing.
b. benchmarking. d. the supply chain.
5. The value chain is the sequence of business functions in which

a. value is deducted from the products or services of an organization.
b. value is proportionately added to the products or services of an organization.
c. products and services are evaluated with respect to their value to the supply chain.
d. usefulness is added to the products or services of an organization.
6. _____________ is the generation of, and experimentation with, ideas related to new
products, services, or processes.
a. Research and development
b. Design of products, services, or processes
c. Production
d. Marketing
7. _____________ is the acquisition, coordination, and assembly of resources to produce a

product or deliver a service.
a. Research and development c. Production
b. Customer services d. Marketing
8. ______________ is an operational factor that directly affects the economic ability of the
organization.
a. Customer focus c. Continuous
improvement
b. A key success factor d. Supply chain
9. Customers are demanding improved performance related to

a. reduced costs
b. both reduced costs and increased quality
c. lower cost, improved quality, and improved customer service
d. lower cost, improved quality, improved customer service, and innovative products
and services.
90 Chapter 4
.
10. The sequence of activities that creates a good or service is:

a. an organization. c. a customer chain.
b. a value chain. d. an information system.
11. There are four broad classes of activities in the value chain. Research and development
would be in which class?
a. activities relating to getting ready to make the product
b. activities related to making the product
c. activities to dealing with the customer
d. other activities that support the first three activities
12. There are four broad classes of activities in the value chain. Storing work in process
c. activities related to dealing with the customer
13. There are four broad classes of activities in the value chain. Billing activities would be in
which class?
14. There are our four broad classes of activities in the value chain. Accounting activities
15. Which of the following activities is value-added?

a. Processing c. storing
b. Moving d. inspecting
16. Which of the following four general steps to improve the effectiveness and efficiency of
an organization's activities would be performed first?
a. identify what is now being done
b. measure current performance
c. Analysis
d. Improve
17. Employees improve effectiveness and efficiency by performing general steps regarding
the organization's activities. The following describes which step?
The employee measures the performance of each activity in the (value chain) from the
perspective of customer while assuring that the overall performance of activities meets
the requirements of the organization’s other stakeholders.
a. Identify what is now being done.
b. Measure current performance.
c. Analyze.
d. Improve.
18. Which of the following would NOT happen when quality is bad?
a. Rework
b. Scrap
c. zero-defects
d. an increase in the cost of good units increases
19. Which of the following statements is true?

a. The customer will choose the product with the lower price.
b. If two products provide the same services and quality, the customer will choose
the product with the lower price.
c. If two products provide the same services and quality, the customer will choose
the product with the higher price.
d. The customer will choose the product with the higher price.
20. A key advantage of cross-functional teams in today's manufacturing and service

environments is
a. information is shared much more quickly by people in different functions and this
helps speed products to market.
b. the physical size of the organization gets smaller.
c. there are fewer computing system requirements.
d. the number of senior managers decreases.
21. Rewarding team performance based on team output can cause problems for team
members because
a. some team members work different shifts than others.
92 Chapter 4
.
b. not all team members pull their weight.

c. the team leader has to get a much higher share of the reward and team members
resent it.
d. day shift workers are entitled to a higher share of the reward than evening shift
workers
22. Continuous education has the following advantages, EXCEPT

a. Employees learn about organizational changes and improvements.
b. employees skills are kept up-to-date.
c. employees learn too much too quickly and get frustrated.
d. employees become more committed to their jobs as they believe the organization
is investing in them.
23. Goal congruence means

a. an employee has set high goals for him/herself.
b. an employee has set low goals for him/herself.
c. an employee's goals are aligned with those of the organization.
d. an employee will never attain his or her goals.
24. A management approach that emphasizes the importance of managing constraints

a. Decentralization c. Control
b. Theory of Constraints d. Business Process
25. A production system in which units are produced and materials purchased only as needed
to meet actual customer demand is called
a. Total quality management c. Process reengineering
b. Just-in-time d. Benchmarking
26. In Process Reengineering, two objectives are to simplify and to eliminate

a. Constraint c. Nonconstraint
b. Non-valued-added activities d. Losses
27. A detailed report to management comparing budgeted data with actual data for a specific
time period is called a
a. Performance report c. Financial accounting report
b. Feedback d. Budget
28. The critical success factors for a business today are all:
a. planning-oriented c. sales-oriented
b. production-oriented d. customer-oriented
29. A process by which a firm identifies its critical success factors, studies the best practices
of other firms for these critical success factors, and then implements improvements in the
firm's processes to match or beat the performance of these competitors is termed:
a. continuous improvement c. strategic management
b. reengineering d. benchmarking
30. A technique in which management develops policies and practices to ensure that the
firm's products and services exceed the customer's expectations is:
a. continuous improvement c. critical success factoring
b. benchmarking d. total quality management
31. A process for creating competitive advantage in which a firm reorganizes its operating
and management functions, often with the result that jobs are modified, combined, or
eliminated is termed:
a. benchmarking c. target costing
b. life cycle costing d. reengineering
32. A strategic technique to help firms effectively improve the most common and important
critical success factor - cycle time, is:
a. activity-based costing c. the theory of constraints
b. benchmarking d. continuous improvement
33. The competitive strategy of "cost leadership" allows a firm to out-perform competitors by
producing products or services:
a. with lowered quality standards.
b. in smaller operational units.
c. at lower costs achieved by increased productivity.
d. with attractive added features.
34. The competitive strategy of "differentiation" requires that a product or service must be:
a. always readily available.
b. price competitive.
c. produced at the lowest possible cost.
d. unique in some important way, usually of being of higher quality.
35. Many firms find that a consideration of critical success factors yields a renewed focus on
the three key factors of:
a. product design, manufacture and distribution
b. cost, price and volume
c. innovation, regulation and utilization
d. cost, quality and speed of product development and delivery
94 Chapter 4
.
36. After critical success factors (CSFs) have been identified, the next step in developing a
competitive is to develop relevant and reliable measure for these CFSs. If these measures
are not developed, a firm cannot hope to:
a. make profit for any extended period.
b. increase sales above previous year(s).
c. develop policies to enhance profitability.
d. monitor its progress toward achieving its strategic goals.
37. In order to achieve a firm's objectives, the strategic cost accounting system must collect,
record and report:
a. the right king of information.
b. information on a very regular basis.
c. only incremental information.
d. detailed information.
38. The "balanced scorecard" accounting report can be made more effective by developing it
at a detail level so that employees:
a. can see how it is put together.
b. appreciate all the effort that goes into its preparation.
c. respect management for including them in its formulation.
d. can see how their actions contribute to the success of the firm.
39. Both leading and lagging indicators should be used in the development of the "balanced
scorecard" accounting report because:
a. leading indicators are future oriented and lagging indicators are primarily
historical output measures.
b. one type of indicator will always correct the other type.
c. leading indicators are express non-quantitatively while lagging indicators are
expressed only in quantitative terms.
d. both answer a and answer b are correct.
40. The objective of the value chain analysis is to identify stages of the value chain where the
firm can:
a. justify increases in the price of the product or service.
b. increase value to the customer or reduce cost.
c. sublet production to other producers.
d. Answer b is most correct, but answer a and c are possibly true.
41. The second step in value chain analysis is to identify the cost driver(s) at each value
activity. The objective of the second step is to identify activities where the firm has a
current or future
a. revenue potential. c. cost advantage.
b. legal responsibility. d. cost overrun.
42. In value chain analysis, the third step choice made by a firm to emphasize its strong
research and development reputation is an example of:
a. low cost manufacturing. c. cost leadership.
b. price leadership. d. innovative design.
43. In regard to critical success factors, which one of the following would not be considered a
financial measure of success?
a. cash flow c. sales growth
b. brand growth d. earnings growth
non-financial customer measure of success?
a. education c. customer satisfaction
b. on-time delivery d. customer service
non-financial internal business process measure of success?
a. cycle time c. high product quality
b. Yield d. market share
46. Which of the following financial critical success factors is measured by earnings from
operations?
a. profitability c. liquidity
b. sales d. flexibility
47. Many firms are finding it is difficult to compete successfully on cost leadership or
differentiation alone, and they must, in fact, compete on both:
a. cost and design c. cost and price
b. price and functionality d. design and
functionality

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Chapter 4

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CHAPTER

After studying this chapter, you should be able to…

1. Understand the basic approach of how a firm’s competitive strategy is developed

2. Explain the strategic measures of success, financial and nonfinancial factors

4. Explain the consequences of lack of strategic information

5. Describe the two basic competitive strategies, namely,

6. Understand and describe the contemporary cost management techniques such as

DEVELOPING A COMPETITIVE STRATEGY

DEVELOPING A COMPETITIVE STRATEGY;

 Who are our most important customers?

STRATEGIC MEASURES OF SUCCESS

Financial performance measures include among others

Non-financial measures of operation include among others

Critical Success Factors How to measure CSF

Financial Measures of Success

Sales Level of sales in critical product groups, sales

Employee morale employee survey

Figure 4-2: Consequences of Lack of Strategic Information

 Decision making based on intuition

Cost Leadership and Product Differentiation

Distinctive Aspects of the Two Competitive Strategies

Other Strategic Issues

CONTEMPORARY COST MANAGEMENT TECHNIQUES

a. Total Quality Management

Just-in-Time (JIT) production is a system in which each component on a production line

Financial Benefits of JIT

1. Lower investment in inventories.

Major Features of JIT Production System

Reengineering is a process for creating competitive advantage in which a firm

Process reengineering, a more radical approach to improvement than TQM, is an

1. A business process is diagrammed in detail.

This process can yield the following anticipated results:

Today benchmarking efforts are facilitated by cooperative networks of noncompeting

Mass customization is a management technique in which marketing and production

The growth of mass customization is in effect another indication of the increased

(a) financial performance,

This is discussed in more details in Chapter 7.

g. Activity-based Costing and Management

h. Theory of Constraints (TOC)

The Theory of Constraints is a sequential process of identifying and removing constraints

The Theory of Constraints emphasizes the importance of managing the organization's

The basic sequential steps followed in applying TOC are

The Theory of Constraints approach is a perfect complement to Total Quality

TOC is discussed more extensively in Chapter 8.

i. Life Cycle Costing

Life-cycle costing is a management technique to identify and monitor the costs of a

(5) sales and service.

Target cost = Market demand price – Desired profit

k. Computer-Aided Design and Manufacturing

More companies are using computer-aided design (CAD) and computer-aided

Computer-aided design is the use of computers in product development, analysis, and

Automation involves and requires a relatively large investment in computers, computer

produces one or more groups of parts or variations of a product in a flexible manner. It

computer-controlled materials-handling systems to link several stand-alone, computer-

Computer-integrated manufacturing (CIM) is a manufacturing system that totally

n. The Value Chain

Analyzing the firm's value chain helps management discover

Illustrative Case 4-1: Value Chain Analysis

Average Cost per Person and Scheduled Games

Red Archer Steps in the Value Chain Roaring Lions

Illustrative Case 4-1 – Analysis of the Value Chain

1. Identify and explain the two types of competitive strategy.

4. Explain the process of identifying a sustainable competitive advantage for a firm.