Strategic Analysis and Strategic Cost Management 1 1

How A Firm Succeeds: The Competitive Strategy Mission Statements of Selected Firms Ford Motor Company (www.ford.com) To be a low-cost producer of the highest quality products and services that provide the best customer value.

How A Firm Succeeds: The Competitive Strategy General Electric (www.ge.com) To become the most competitive enterprise in the world by being number one or number two in market share in every business the company is in. International Business Machines (www.ibm.com) To be the most successful information-technology company in the world.

How A Firm Succeeds: The Competitive Strategy Motorola (www.motorola.com) To complete the picture at home – integrating broadband with wireless services. Johnson & Johnson (www.jnj.com) To alleviate pain and disease. United Parcel Service (www.ups.com) To move at the speed of business.

How A Firm Succeeds: The Competitive Strategy Walt Disney (www.disney.com) To make people happy. Merck (www.merck.com) To preserve and improve human life.

The Prior Business Environment The Contemporary Business Environment Cost Management Focus The Prior Business Environment The Contemporary Business Environment Financial reporting focus Common emphasis on standardization and standard costs The accountant as functional expert and financial scorekeeper View of cost accounting as a tool for the development and implementation of business strategy The accountant as a business partner

Financial Measures of Success Sales growth Earnings growth Dividend growth Bond and credit ratings Cash flow Increase in stock price

Nonfinancial Measures of Success Customer Measures Market share, and growth in market share Customer service On-time delivery Customer satisfaction Brand recognition Positions in favorable markets

Nonfinancial Measures of Success Internal Business Processes High product quality Manufacturing innovation High manufacturing productivity Cycle time Yield, reduction in waste

Nonfinancial Measures of Success Learning and Innovation Competence and integrity of managers Morale and firm-wide culture Education and training Innovation

Consequences of Lack of Strategic Information Decision making based on guess and intuition only Lack of clarity about direction and goals Lack of a 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 Failure to identify more profitable products, customers, and markets

Developing a Competitive Strategy Cost leadership – outperform competitors by producing at the lowest cost. Differentiation – creating a perception among consumers that your products or services are unique in some important way, usually related to quality.

Aspects of the Two Competitive Strategies

Critical Success Factors Step 1: Obtain a strategic competitive analysis of the firm using SWOT analysis. What are its strengths and weaknesses, opportunities and threats? Determine the firm’s overall strategy (cost/differentiation) and critical success factors. Step 2: Develop relevant and reliable measures for the critical success factors identified in the first step. Step 3: Develop a strategic cost information system for supporting the firm’s overall strategy and for reporting critical success factors to appropriate managers.

Strengths and Weaknesses Product lines Are the firm’s products innovative? Are the product offerings too wide or too narrow? Are there important and distinctive technological advances?

Strengths and Weaknesses Management What is the level of experience and competence?

Strengths and Weaknesses Research and Development Is the firm ahead or behind competitors? What is the outlook for important new products and services?

Strengths and Weaknesses Manufacturing How competitive, flexible, productive, and technologically advanced are the current manufacturing processes? What plans are there for improvement in facilities and processes?

Strengths and Weaknesses Marketing How effective is the overall marketing approach, including promotion, advertising, and selling?

Strengths and Weaknesses Strategy How clearly defined, communicated and effectively implemented is corporate strategy?

Opportunities and Threats Barriers to entry Intensity of rivalry among competitors Pressure from substitute products Bargaining power of customers Bargaining power of suppliers

Critical Success Factors Step 1: Obtain a strategic competitive analysis of the firm using SWOT analysis. What are its strengths and weaknesses, opportunities and threats? Determine the firm’s overall strategy (cost/differentiation) and critical success factors. Step 2: Develop relevant and reliable measures for the critical success factors identified in the first step. Step 3: Develop a strategic cost information system for supporting the firm’s overall strategy and for reporting critical success factors to appropriate managers.

Measures for Critical Success Factors Financial Factors Profitability Liquidity Sales Market value Customer Factors Customer satisfaction Dealer and distributor Marketing and selling Timeliness of delivery Quality Learning and Innovation Product innovation Timeliness of new product Skill development Employee morale Competence Internal Business Procedures Quality Productivity Flexibility Equipment readiness Safety

Critical Success Factors Step 1: Obtain a strategic competitive analysis of the firm using SWOT analysis. What are its strengths and weaknesses, opportunities and threats? Determine the firm’s overall strategy (cost/differentiation) and critical success factors. Step 2: Develop relevant and reliable measures for the critical success factors identified in the first step. Step 3: Develop a strategic cost information system for supporting the firm’s overall strategy and for reporting critical success factors to appropriate managers.

Information Systems for Critical Success Factors Corporate Level Vice President Manufacturing

Information Systems for Critical Success Factors Vice President Manufacturing Plant Manager

Information Systems for Critical Success Factors Plant Manager Department Manager

The Balanced Scorecard Customer Satisfaction Has the percentage of on- time deliveries improved? Financial Measures Did earnings increase? COMPETITIVE SUCCESS Learning and Innovation How many new patents this year? Internal Operations Has profitability improved?

Value Chain of the Manufacturing Industry Design Flow of Product Development Acquisition of Raw Materials Manufacturing: Assembling, testing, and packaging Warehousing and Distribution Retail Sales Customer Service

Value-Chain Analysis Identify the value-chain activities. Identify the cost driver(s) at each value activity. Develop a competitive advantage by reducing cost or adding value. Identify competitive advantage (cost leadership or differentiation). Identify opportunities for added value. Identify opportunities for reduced cost. Exploit linkages among activities in the value chain.

Value Chain for the Computer-Manufacturing Industry

Linking Strategic Resources Strategic Positioning Value Chain Analysis Balanced Scorecard

End of Chapter 2