Page 259 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes superior, they become more willing to pay a premium price relative to the price they will have
to pay for competitive offerings. The second is a relative low-cost advantage, under which
customers gain when a company’s total costs undercut those of its average competitor.
Differentiation Advantage: The primary focus is to differentiate the product of the business unit
by creating something that is perceived by customers as being unique. Approaches to product
differentiation include brand loyalty (Coca Cola and Pepsi Cola in soft drinks), superior customer
service, dealer network, product design and product features and technology.

Example: BMW in automobiles, Rolex in wrist watches, Mont Blanc in pens.
Low-cost Advantage: Cost leadership can be achieved through economies of scale, experience
curve effects, tight cost, control and cost minimisation.

Example: Hyundai in automobiles.

Self Assessment

Fill in the blanks:
1. By systematically analysing costs, revenues and asset in each activity, the business unit
can achieve …………………… cum differentiation advantage.
2. The …………………… emphasises the close relationship between the functional strategies
within a company.

14.2 Low-cost Provider Strategies

A low-cost leader’s basis for competitive advantage is lower overall costs than competitors.
Successful low-cost leaders are exceptionally good at finding ways to drive costs out of their
businesses. For maximum effectiveness, companies enjoying a low-cost provider strategy need
to achieve their cost advantage in ways difficult for rivals to copy or match. If rivals find it
relatively easy or inexpensive to imitate the leader’s low-cost methods, then the leader’s advantage
will be too short-lived to yield a valuable edge in the marketplace.
A company has two options for translating a low-cost advantage over rivals into attractive
profit performance.
Option 1: Out manage rivals in the efficiency with which value chain activities are performed
and in controlling the factors that drive the costs of value chain activities.
Controlling the Cost drivers: There are nine major cost drivers that come into play in determining
a company’s costs in each activity segment of the value chain:
1. Economies or Diseconomies of scale: Economies of scale arise whenever activities can be
performed more cheaply in larger volumes than smaller volumes and from the ability to
spread out certain costs like R&D and advertising over a greater sales volume.
2. Learning and experience curve effects: The cost of performing an activity can decline over
time as the experience of company personnel builds. Learning-curve economies can stem
from debugging and mastering newly introduced technologies, finding ways to improve
plant layout and work flows and making product design modifications that streamline
the assembly process.
3. The cost of key resource inputs: the cost of performing value chain activities depends in
part what a firm has to pay for key resource inputs. Input costs are a function of four factors

254 LOVELY PROFESSIONAL UNIVERSITY