Page 258 - DCOM206_COST_ACCOUNTING_II

Unit 14: Emerging Concepts in Cost Management

Notes
Figure 14.1: Value Chain Analysis for a Business

New Product
Marketing and Sales Operations Distribution/Services
Development
Support Activities: Finance, Human Resources, Information Technology

For each value added activity, the key questions are:
1. Can we reduce costs in this activity, holding revenue value constant?
2. Can we increase revenue in this activity, keeping the costs constant?
3. Can we reduce assets in this activity keeping costs and revenues constant?

4. Most importantly, can we do (1), (2) and (3) simultaneously?
By systematically analysing costs, revenues and asset in each activity, the business unit can
achieve cost cum differentiation advantage.

To execute a company’s competitive strategy, all the above functions play a role, and each must
develop its own strategy. Here, strategy refers to what each process or function will try to do
particularly well.
A product development strategy specifies the portfolio of new products that the company will
try to develop. It also decides whether the development effort will be made in-house or
outsourced. A marketing and sales strategy specifies how the market will be segmented and
how the products will be positioned, priced and promoted. A supply chain strategy determines
the nature of procurement of raw materials, transportation of materials to and from the company,
manufacturer of the product or operation to provide the service, and distribution of the product
to the customer, along with any follow-up service and a specification of whether these processes
will be performed in-house or outsourced. Given that firms are rarely completely vertically
integrated, it is important to recognise that the supply chain strategy defines not only what
processes within the firm should do well but also what role played by each supply chain entity
is. Supply chain strategy includes a specification of the broad structure of the supply chain and
what many traditionally call “supplier strategy”, “operations strategy”, and “logistics strategy”.

Note The value chain emphasises the close relationship between the functional strategies
within a company. Each function is crucial if a company is to satisfy customer needs
profitability. Thus, the various functional strategies cannot be formulated in isolation.
They are closely intertwined and must fit and support each other if a company has to
succeed.

14.1.1 Competitive Advantage and Customer Value

In order to prosper and survive in industry, firms meet two criteria viz., they must supply what
customers want to buy, and they must survive competition. A firm’s overall competitive
advantage derives from the difference between the value it offers to customers and its cost of
creating that customer value.
Competitive advantage with regard to product and services takes two possible forms. The first
one is an offering or differentiation advantage. If customers perceive a product or service as

LOVELY PROFESSIONAL UNIVERSITY 253