Page 268 - DCOM206_COST_ACCOUNTING_II

Unit 14: Emerging Concepts in Cost Management

3. Analyse segment attractiveness: Competitive assessments using industry structure analysis Notes
or core competencies analysis can also be used to evaluate the profitability of different
segments. However, the competitive focus shifts to an analysis of the different segments.

Example: In the frozen foods industry segmentation, independent grocers and caterers
may be willing to substitute within the segments and from outside sources must be carefully
examined.

In addition, the interrelationship among segments must be a carefully considered. For
example, caterers may purchase frozen food items from super markets at bargain prices.
Segments may be natural buyers, sellers or substitutes for one another.
4. Identify key success factors for each segment: Quality, delivery, customer satisfaction,
market share, profitability and return on investment are common measures of corporate
success. In this regard, each segment must be assessed using the most appropriate key
success factors. Cost and differentiation on advantages should be highlighted by these
measures.
5. Analyse attractiveness of broad versus narrow segment scope: A wide choice of segments
for an industry requires careful matching of a firm’s resources with the market. The
competitive advantage of each segment may be identified in terms of low cost and/or
differentiation.
Sharing costs across different market segments may provide a competitive advantage. For
example, Gillette broadened its shaving systems to include electric shavers through its
1970 acquisition of Braun. Lipton recently entered the bottled iced-tea market.
A segment justifying a unique strategy must be worthwhile size to support a business
strategy. Furthermore, that business strategy needs to be effective with respect to the
target segment in order to be cost effective.

14.4.4 Limitations of Value Chain Analysis

There are several limitations to the implementation and interpretation of value chain analysis.
These are given below:
 The internal data on costs, revenues and assets used for value chain analysis are derived
from one period’s financial information. For long-term strategic decision-making, changes
in cost structures, market prices and capital investments from one period to the next may
alter the implications of value chain analysis.
 Identifying stages in an industry’s value chain is limited by the ability to locate at least
one firm that participates in a specific stage. Breaking a value stage into two or more
stages when an outside firm does not compete in these stages is strictly judgement.
 Fining the costs, revenues and assets for each value chain activity sometimes presents
serious difficulties.
 Isolating cost drivers for each value-creating activity, identifying value chain linkages
across activities and computing supplier and customer profit margins present serious
challenges.

!
Caution Despite the calculation difficulties, experiences indicate the performing value
chain analysis can yield firms invaluable information for their competitive situation, cost
structure, and linkages with suppliers and customers.

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