1.  Instructor: Michael Cooke  E-mail Address : michco@kku.ac.thmichco@kku.ac.th  Office: IC room 817  Class hours:Tuesday 09:00-12:00  Class Location: IC room 822

2. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -2

3. Term Project Likely Project Topics Thai silk Thai rubber and rubber products Thai rice Thai shrimp Thai cassava Thai tourist industry Choose a topic and a partner by 3-December Advise 10-15 minute presentation form, papers accepted Look at the business using the Five Forces framework Suggest and support a strategy Due 28 January for presentations

4. Dream-liner Cost Recovery In 2004 Boeing estimated $5.8 BB development costs for the new passenger jet http://seattletimes.com/html/businesstechnology/2016310102_boeing25.html

5. Notes for “Art of Pricewar” Three generic strategies for a company : Find a niche Differentiate (innovate) Low cost – the focus for today Low cost requires high volume in most cases High volume can be achieved by organic growth or through mergers and acquisitions Organic growth achieved by gaining market share or by holding share in a growing market Horizontal integration: expansion of activities at the same level Production economies of scale Shared resources Potential global reach (and reduced trade costs with production bases abroad) Size brings more power over suppliers Disadvantage may be difficult to manage due to bureaucratic structure or complexity Vertical integration: expansion into activities above or below. Supply chain coordination and control advantages Cost advantages (from owning profits and from escaping transaction taxes) Cost disadvantages Lack of competition – Note: one reason firms choose to outsource Scale of upstream or downstream activities might be small Lack of flexibility from owning upstream and downstream assets Potentially puts the firm in a position of competing with customers

6. Fixed and Variable Costs Cost classification depends on how costs change with business activity Fixed costs do not change with volume Example: Management salaries, property Fixed costs are typically allocated (full costing) Variable costs vary in proportion to volume Examples: Direct materials, direct labor, variable factory overhead Also called direct costs Step Variable or Step Fixed costs are constant over some range, then increase Marginal cost is the cost of an additional unit Marginal cost of carrying one additional airline passenger is near zero if seats are available Marginal cost of one additional passenger would be high if a flight has to be added All external reporting uses absorption or full cost Includes fixed factory overhead Margins are lower than with variable costing Internal decision makers may use variable costing 6

7.  Rev $12,000,000  COGS $6,000,000  Gross p $6,000,000  R&D 1,000,000  SG&A 5,000,000  Expense $6,000,000  Net p $0  Units 1,000,000  Price/unit $12  Cost per unit $6  Rev $18,000,000  COGS $12,000,000  Gross p $6,000,000  R&D 1,000,000  SG&A 5,000,000  Expense $6,000,000  Net p $0  Units 2,000,000  Price/unit $9  Cost per unit $6 7

8.  Volume 100,000  Setup $ 50,000  Direct A* $200,000  Total $250,000  Cost/unit$2.50  * Ave direct cost per unit is $2.  Volume 800,000  Setup $ 50,000  Direct* $ 400,000  Total $450,000  Cost/unit$0.56  * Ave direct cost per unit is $0.50 (A+700,000*$0.29) /800,000 8

9.  Rev $12,000,000  COGS $6,000,000  Gross p $6,000,000  R&D 1,000,000  SG&A 5,000,000  Expense $6,000,000  Net$ 0  Units 1,000,000  Price/unit $12  Unit cost $ 6  Rev $18,000,000  COGS $10,000,000  Gross p $8,000,000  R&D 1,000,000  SG&A 5,000,000  Expense $6,000,000  Net $2,000,000  Units 2,000,000  Price/unit $9  Unit cost $5 9

10. Applying Basic Cost Concepts Assume excess capacity What is the lowest price a company would accept? If COGS includes $1 fixed factory cost/unit? Suppose a company prices additional units at direct cost Would this affect the price of current units? Where does overhead go when products are priced at variable cost? How would a customer react to a price increase later? Assume longer production run (example 2) Would a company accept losses on initial orders to build a market? High cost of initial production would deter prospective customers if passed through in prices Expected volumes may be used when products are early in their life cycle Galanz’s pricing strategy – costs decrease when sales increase IBEA merely quantifies the effects of price*volume and unit cost*volume where prices, volumes and costs are changing http://home.kku.ac.th/michco/Business_Strategy/Gross margin calcs.xlsx 10

11. Choose two companies in similar lines of business From the most recent Annual Reports Revenue 2010 and 2011 Cost of Goods 2010 and 2011 Gross profit for each period, and Gross Profit % Research and Development as % of Revenue each pd Receivables as % of revenue each period Inventories as % of revenue each period Company comments about FX risk and interest rate risk A couple of comments about any differences among the companies that seem noteworthy Class Assignment Due 30 November

12. Typical Income Statement Net Revenue Less COGS (includes provision for inventory write-off) Gross Profit SG&A (mostly fixed cost in short term) Administration (usually includes finance, may include MIS) Sales and Marketing (may include pricing and customer service) Distribution Research and Development Net (operating) income before taxes and depreciation Taxes etc Net income How do you get information about a privately held company? Why does Apple fight so hard to not have to reveal segment cost information?

13. 1 : Substitution is more likely to occur when A) Consumer switching costs decrease B) Relative price of substitutes increases C) Relative price of substitutes decreases D) Both A and C 2: Size is imperative in many industries because A) Low cost requires high volume B) Successful product differentiation uses the branding of large companies C) Consumers prefer to deal with large corporations D) Size is never imperative because companies may use a niche strategy 3: Volume can be achieved by A) Organic growth B) Mergers C) Acquisitions D) Any of the above 4: A disadvantage of horizontal integration is A) Reduction of costs through establishing subsidiaries abroad B) Lack of flexibility from owning upstream and downstream assets C) Potentially slow bureaucratic structure D) Economies of scale 5: Potential disadvantages of vertical integration include A) Control of supplies B) Scale of upstream or downstream activities might be small C) More transaction taxes D) None of the above 6: If a firm lowers prices to achieve volume increase while unit costs remain constant, which will certainly occur? A) Gross margin percentage will fall B) Revenue will always decline C) Net profit will decline D) Net profit will stay the same