DEVELOPING A COMPETITIVE STRATEGY

&
CONTEMPORARY COST MANAGEMENT
TECHNIQUE
 In developing a
sustainable competitive
position, each firm
Developing a purposefully or as a
Competitive result of market forces
Strategy arrives at one of the
two competitive
strategies:
cost leadership or
differentiation.
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Cost Leadership
• Cost leadership is a competitive strategy in which a firm
outperforms competitors in producing products or services at the
lowest cost.
• The cost leader makes sustainable profits at lower prices, thereby
limiting the growth of competition in the industry through its
success at reducing price and undermining the profitability of
competitors, which must meet the firm’s low price.
• The cost leader normally has a relatively large market share and
tends to avoid niche or segment markets by using the price
advantage to attract a large portion of the broad market.
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Differentiation
• The differentiation strategy is implemented by creating a product or
service that is unique in some important way, usually in regard to higher
quality, better customer service, improved product features, or some
type of innovation.
• Sometimes a differentiation strategy is called product leadership to refer
to the innovation and features in the product.
• In other cases, the strategy might be called a customer-focused or
customer-solution strategy, to indicate that the organization succeeds
on some dimension(s) of customer srvice.

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Distinctive Aspects of the Two Competitive Strategies

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 Managers commonly use the following
tools to implement the firm’s broad strategy
and to facilitate the achievement of
success on critical success factors:
• just-in-time (JIT)
• total quality management
• process reengineering
• Benchmarking
CONTEMPORARY COST • mass customization
MANAGEMENT • balance scorecard
TECHNIQUES • activity-based costing and
management
• theory of constraints (TOC)
• life cycle costing
• target costing
• computer-aided design and
manufacturing
• Automation
• e-commerce
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• value chain and supply-chain analysis
Total Quality Management
• 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.
• 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.
• TQM affects product costing by reducing the need to track the cost of
crap 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.
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 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 a minimum and in some cases,
zero

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Financial Benefits of JIT
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 customer.
8. Reductions in paperwork.

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Process Reengineering
• Reengineering is a process of 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 design 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.

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Benchmarking
• Benchmarking is a process by which a firm
 Determines its critical success factors
 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

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Mass Customization
• Mass Customization is a management technique in which marketing
and production processes are design 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.

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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 factors that contribute to the success of the firm in achieving its
strategic goals. The use of the balance scorecard is thus a critical ingredient of the
overall approach that firms take to become and remain competitive.

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Activity-based Costing and 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 the
operational control and management control

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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.

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• The basic sequential steps followed in applying TOC are
1. Analyze all 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.

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 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
1. 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

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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 determined price – Desired Profit

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Computer-Aided Design and Manufacturing
• Computer-aided design (CAD) 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 computers to plan,
implement, and control production.

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 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.

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E-Commerce
• A number of internet-based companies have emerged and had 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.

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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. They 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 help 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
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 Thank you!

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