A GENERIC STRATEGIC TOOL TO IMPROVE

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A GENERIC STRATEGIC TOOL TO IMPROVE VALUE CHAIN
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THE VALUE CHAIN AND THE COST ANALYSIS
DEFINING VALUE CHAIN FOR COST ANALYSIS
THE SIZE AND GROWTH OF THE COST REPRESENTED BY
ACTIVITY
THE COST BEHAVIOUR OF THE ACTIVITY
ADVERTISING AND PROMOTION ( SCALE V/S VARIABLE)
COMPETITOR DIFFERENCES IN PERFORMING THE
ACTIVITY
HIGH V/S LOW FARE AIRLINES
ASSIGNING COSTS AND ASSETS PARTICULARLY FOR SHAR
ED ACTIVITIES
FIRST CUT ANALYSIS OF COSTS
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COST BEHAVIOUR

• COST DRIVERS (TEN COMANDMENTS )
• ECONOMIES OR DISECONOMIES OF SCALE
• LEARNING AND SPILLOVERS
• PATTRERN OF CAPACITY UTILISATION
• LINKAGES(joint optimization or coordination)
• LINKAGES WITHIN THE VALUE CHAIN
• (Direct or Indirect),(quality assurance and
  other)
  
• VERTICAL LINKAGES(with suppliers and channels)
• INTERRELATIONSHIPS(IBM and Daksh)
• INTEGRATION(Economies of Joint operations)
• TIMING(Early movers and late movers)
• DISCRETIONARY POLICIES
• LOCATION
• INSTITUTIONAL FACTORS

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TYPICAL MEASURES OF LEARNING
Cumulative Volume in the industry
-determining machine speed or reject rates in
fabrication operations
Time in operation -typical for work-flow layout i
n assembly Cumulative Investment -typical of p
lant efficiency Cumulative industry volume -Ty
pical for product design improvements that lower
costs where spillovers are high Exogenous te
chnical Change -typical for basic process improve
ments
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SOME POLICY CHOICES THAT HAVE GREATER IMPACT ON
COST
Product configuration, performance and features
Mix and variety of products offered
Level of service provided
Delivery time
Buyers served (e.g. small v/s large)
Spending rate on marketing and technology
development activities
Channels employed (Fewer efficient v/s many
small)
Process technology chosen
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SOME POLICY CHOICES THAT HAVE GREATER IMPACT ON
COST
Contd--
The specifications of raw materials or other
purchased inputs used
Wages paid and amenities provided to employees,
relative to prevailing norms
Other HR policies including hiring, training, and
employee motivation
  Procedures for scheduling production,
maintenance of the sales force and other
activities
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INTERACTIONS AMONGST THE COST DRIVERS
DRIVERS EITHER REINFORCE OR COUNTERACT EACH OT
HER
REINFORCEMENT SHIFTING LOCATION IN CASE OF MILK
POWDER SUPPORTED THE LOGISTICS GREATLY
COUNTERACTION IMPROVING POSITION VIS A IS ONE
DRIVER MAY WORSEN A FIRMS POSITION VIS A
VIS ANOTHER. LARGE SCALE LEADING
TO THREAT OF UNIONS, UNDERCAPACITY UTILIS
ATION ETC.
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Segment cost behavior
Analyze the costs of those product lines, buyer
types or other portions of its activities that
say Nirulas Ice creams
      Have significantly different value chains
      Appear to have different cost drivers
      Employ questionable procedures for
allocating costs
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Cost Dynamics
Cost Dynamics are the points that firms must
consider to see how the absolute and re
lative cost of value activities
will change over time, independent of its
strategy.
This enables the firm to forecast how the cost
drivers of value activities may change, and which
value activities will increase or decrease, in
absolute or relative cost importance.
This insight, enables firm to retain cost
advantage by anticipating changes and moving
quickly to respond to them.
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The most common Cost Dynamics
      Industry real growth
In some industries real growth leads to supply
demand Gaps while in other the supplies become
cheap as the Suppliers get more efficient.
      Differential scale sensitivity
Software costs are relatively higher than
hardware in computers,gaming, Telecommunications
as hardware could get scale based.
      Different learning rates
Assembly costs normally reduced fast to higher
learning rates.
      Differential technological change
Low cost mobiles, technology for logistical
operations.
      Relative inflation of costs
High fuel cost has made fuel costing 50 of
airlines value chain
      Aging Capital Base and workforce
Higher indirect costs such as maintenance and
efficiency losses
      Market adjustment
De branding by retailers Aldi in Germany
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Cost advantage

• A firm has a cost advantage if its cumulative
  cost of performing
  
• all value activities is lower than competitors
  costs.
  
• A firms relative cost position is a function of
  
  
• The composition of its value chain vis a vis
  competition and
  
• Its relative position vis a vis the cost drivers
  of each activity.

Key step is to identify the relative cost of
competitors by understanding their value chain (
Walls v/s Mother Dairy)
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Two major ways of gaining Cost Leadership
Control Cost Drivers Gaining advantage with
respect to the cost drivers of value activitie
s representing a significant proportion of tot
al costs
 
Reconfigure the value chain By adopting a
different and more efficient way to desi
gn, produce, distribute or market the pr
oducts
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CONTROLLING COST DRIVERS CONTROLLING SCALE S
ET POLICIES TO REINFORCE SCALE ECONOMIES IN SCALE
SENSITIVE ACTIVITIES. ( STANDARDISATION) EXPL
OIT THE TYPES OF SCALE ECONOMIES WHERE THE FIRM
IS FAVORED (GLOBALISATION-CENTRALISED PRODUCT DEV
ELOPMENT) EMPHASIZE VALUE ACTIVITIES DRIVEN BY
TYPE OF SCALE WHERE THE FIRM HAS AN ADVANTAGE
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CONTROLLING LEARNING KEEP LEARNING PROPRIETORY
BACKWARD INTEGRATION TO PRODUCT KNOW HOW
(SUNDARAM FASTENERS TOOL LIBRARY)
CONTROLLING EMPLOYEE PUBLICATIONS OR OTHER FORMS
OF INFORMATION DISSEMINATION RETAINING KEY EMPLO
YEES STRICT NON DISCLOSURE PROVISIONS IN EMPLOYME
NT CONTRACTS
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CONTROLLING OTHER COST DRIVERS

• PATTERN OF CAPACITY UTILISATION
• PEAK LOAD OR CONRIBUTION PRICING,MARKETING
  ACTIVITIES,
  
• LINE EXTENSIONS IN PROPRIETORY BRANDS,LETTING
  COMPETITORS SERVE
  
• FLUCTUATING SEGMENTS, SHARING ACTIVITIES WITH
  SISTER UNITS
  
• LINKAGES
• LINKAGES WITHIN THE VALUE CHAIN
• VERTICAL LINKAGES
• INTERRELATIONSHIPS ..SHARING ACTIVITIES
• INTEGRATION
• TIMING (EXLOIT MOVER ADVANTAGES, TIMELY
  PURCHASES
  
• IN BUSINESS CYCLES)
• DISCRETIONARY POLICIES
• LOCATION
• INSTITUTIONAL FACTORS
• PROUREMENT AND COST ADVANTAGE

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CONTROLLING DISCTRETIONARY POLICIES
DEVELOPING LOW COST PROCESSES FACILITATING AUTO
MATION
LOW COST PRODUCT DESIGNS AVOID FRILLS
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Reconfiguring the value chain for cost leadership
      A different production process
      Difference in automation
      Direct sales instead of indirect sales
      A new distribution channel
      A new raw material
      Different modes of forward and backward
integration
      New advertising and promotion media
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Pitfalls in Cost Leadership Strategy
      Ignoring procurement
      Overlooking indirect or small activities
Milk Procurement losses
      False perception of cost drivers
National share and not regional share as
the cost driver(thums up)
      Failure to exploit linkages
Direct v/s indirect, vertical and quality
assurance v/s servicve
      Exclusive focus on the Cost of
Manufacturing
Activities
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      Contradictory cost reduction
Large market share for scale economies but with
more varieties
Sitting next to buyer but lowering weight in
product design
      Unwitting cross subsidy
Timex watches, Red wine and White wine costing
      Thinking incrementally Incremental thinkin
g leads point of diminishing returns while
reconfiguring value chain gives a new cost plateau
      Undermining Differentiation
Cost reduction should concentrate on activities
that do not contribute To the firms differentiat
ion.