2 What is Strategy? Strategy describes how an organization matches its own capabilities with the opportunities in themarketplace to accomplish its overall objectives.Understanding the industry is keyPorter’s 5 forces: Industry analysis regarding:CompetitorsPotential entrants into the marketEquivalent productsBargaining power of customersBargaining power of input suppliers
3 1. Product differentiation Generic Strategies1. Product differentiationability to offer products or services perceived by its customers to be superior and unique relative to the products or services of its competitorsbuilds on brand loyalty and the willingness of customers to pay high prices2. Cost leadershipstrategic idea: ride down the experience curve faster than competitorskey strategic variable: relative market sharecan be enhanced preferably during the early stages of the product life cycleImplementation of Strategy (Role of Management Accounting) :Management accountants design reports to help managers track progress in implementing strategy.Strategically relevant objectivesGrowthPrice RecoveryProductivity
4 Revenue effect of growth component = (Actual units sold current year – actual units soldprevious year) × output price (previous year)Cost effect of growth component= (Units of input or capacity that wouldhave been used in previous year to producecurrent year’s output assuming the input-outputrelationship of previous year– actual units or capacity current year) × input price (previous year)
5 Price-Recovery Component Revenue effect of price-recovery component= (Output price (current year) – Output price(previous year))× Actual units of output sold (current year)Cost effect of price-recovery component= (Input prices (current year) – Input prices× units of input or capacity that wouldhave been used in previous year to producecurrent year’s output assuming the input-output relationship of previous year(current year)
6 Productivity Component = (actual units or capacity current year– units of input or capacity that wouldhave been used in previous year to producecurrent year’s output assuming the input-output relationship of previous year)× input prices current year)
7 Change in Operating Income GrowthcomponentPrice-recoveryProductivity(prices and volumeof current year)RevenueeffectCosteffectRevenueeffectCosteffect(productivity and pricesprevious year)(productivity previous yearvolume of current year)
8 Managing unused capacity: Engineered Costs vs Discretionary Costs Engineered costs result specifically from a clear cause-and-effect relationship between output and the resources needed to produce that output.They can be variable or fixed in the short runEngineered costs pertain to processes that are detailed, physically observable, and repetitive.Discretionary costs have two important features.They arise from periodic (usually yearly) decisions regarding the maximum amount to be incurred.They have no measurable cause-and-effect relationship between output and resources used.Discretionary costs are associated with processes that are sometimes called black boxes, because they are less precise and not well understoodE.g. Advertising, executive training, R&D costs
9 Managing Unused Capacity What actions can management take when it identifies unused capacity?Attempt to eliminate the unused capacityAttempt to use the unused capacity to grow revenueCCs:modified from 11th ed. (8%)13-23 (= ) (8%)13-27 (= ) (8%)13-33 (= ) (9%)13-35 (= ) (5%)13-39 (new in 11th ed.) (9%)
10 13-19 OI both yearsgrowth, price-recovery, and productivity components of OI changecomment
11 3-23 OI both yearsgrowth, price-recovery, and productivity components of OI changecomment
12 13-33 Strategy? OI both years growth, price-recovery, and productivity components of OI changecomment
13 13-35subscribers in 20055 customer help desks 8 hrs/day, 250 days per yearfixed salary: $36 000customer 10 minutes (average)help call costs: engineered or discretionary?cost of unused capacity in each case2006: subscribers, same percentage calling help as in 2005; requirement as in 2.
14 13-39 Downsizing acceptable? Breakeven level of revenues fo Wilco? Preferred alternative?other factors to be considered
15 3-27 OI both yearsgrowth, price-recovery, and productivity components of OI changecomment
16 Quiz 1. Reengineering is a key element in cost leadership strategy. price recovery strategy.product differentiation strategy.productivity measures.2. Which of the following is not a key aspect of reengineering?Eliminating unnecessary activities and tasksDeveloping employee skillsChanging roles and responsibilitiesWorking on one activity at a time to improve production processes
17 Quiz3. The analysis used for evaluating the success of a strategy through changes in operating income components uses actual results of the current year compared toa. budgeted results for the current year.b. actual results for the previous year.c. target amounts for the current year.d. budgeted results for the previous year.4. The growth in market share is used in calculating the net income effecta. of industry growth.b. of product differentiation.c. of cost leadership.d of either cost leadership or product differentiation, depending upon the strategy chosen.