1. Strategic Profitability Analysis
Chapter 13
Strategic Profitability Analysis

2. What is Strategy? Strategy describes how an organization matches
its own capabilities with the opportunities in the
marketplace to accomplish its overall objectives.
Understanding the industry is key
Porter’s 5 forces: Industry analysis regarding:
Competitors
Potential entrants into the market
Equivalent products
Bargaining power of customers
Bargaining power of input suppliers

3. 1. Product differentiation
Generic Strategies
1. Product differentiation
ability to offer products or services perceived by its customers to be superior and unique relative to the products or services of its competitors
builds on brand loyalty and the willingness of customers to pay high prices
2. Cost leadership
strategic idea: ride down the experience curve faster than competitors
key strategic variable: relative market share
can be enhanced preferably during the early stages of the product life cycle
Implementation of Strategy (Role of Management Accounting) :
Management accountants design reports to help managers track progress in implementing strategy.
Strategically relevant objectives
Growth
Price Recovery
Productivity

4. Revenue effect of growth component
= (Actual units sold current year – actual units sold
previous year) × output price (previous year)
Cost effect of growth component
= (Units of input or capacity that would
have been used in previous year to produce
current year’s output assuming the input-output
relationship of previous year
– actual units or capacity current year) × input price (previous year)

5. Price-Recovery Component
Revenue effect of price-recovery component
= (Output price (current year) – Output price
(previous year))
× Actual units of output sold (current year)
Cost effect of price-recovery component
= (Input prices (current year) – Input prices
× units of input or capacity that would
have been used in previous year to produce
current year’s output assuming the input-
output relationship of previous year
(current year)

6. Productivity Component
= (actual units or capacity current year
– units of input or capacity that would
have been used in previous year to produce
current year’s output assuming the input-
output relationship of previous year)
× input prices current year)

7. Change in Operating Income
Growth
component
Price-recovery
Productivity
(prices and volume
of current year)
Revenue
effect
Cost
effect
Revenue
effect
Cost
effect
(productivity and prices
previous year)
(productivity previous year
volume of current year)

8. Managing unused capacity: Engineered Costs vs Discretionary Costs
Engineered costs result specifically from a clear cause-and-effect relationship between output and the resources needed to produce that output.
They can be variable or fixed in the short run
Engineered costs pertain to processes that are detailed, physically observable, and repetitive.
Discretionary costs have two important features.
They arise from periodic (usually yearly) decisions regarding the maximum amount to be incurred.
They have no measurable cause-and-effect relationship between output and resources used.
Discretionary costs are associated with processes that are sometimes called black boxes, because they are less precise and not well understood
E.g. Advertising, executive training, R&D costs

9. Managing Unused Capacity
What actions can management take when it identifies unused capacity?
Attempt to eliminate the unused capacity
Attempt to use the unused capacity to grow revenue
CCs:
modified from 11th ed. (8%)
13-23 (= ) (8%)
13-27 (= ) (8%)
13-33 (= ) (9%)
13-35 (= ) (5%)
13-39 (new in 11th ed.) (9%)

10. 13-19
  OI both years
growth, price-recovery, and productivity components of OI change
comment

11. 3-23
  OI both years
growth, price-recovery, and productivity components of OI change
comment

12. 13-33 Strategy? OI both years
growth, price-recovery, and productivity components of OI change
comment

13. 13-35
subscribers in 2005
5 customer help desks 8 hrs/day, 250 days per year
fixed salary: $36 000
customer 10 minutes (average)
help call costs: engineered or discretionary?
cost of unused capacity in each case
2006: subscribers, same percentage calling help as in 2005; requirement as in 2.

14. 13-39 Downsizing acceptable?
Breakeven level of revenues fo Wilco? Preferred alternative?
other factors to be considered

15. 3-27
  OI both years
growth, price-recovery, and productivity components of OI change
comment

16. Quiz 1. Reengineering is a key element in cost leadership strategy.
price recovery strategy.
product differentiation strategy.
productivity measures.
2.       Which of the following is not a key aspect of reengineering?
Eliminating unnecessary activities and tasks
Developing employee skills
Changing roles and responsibilities
Working on one activity at a time to improve production processes

17. Quiz
3.       The analysis used for evaluating the success of a strategy through changes in operating income components uses actual results of the current year compared to
a.       budgeted results for the current year.
b.       actual results for the previous year.
c.       target amounts for the current year.
d.       budgeted results for the previous year.
4.       The growth in market share is used in calculating the net income effect
a.       of industry growth.
b.       of product differentiation.
c.       of cost leadership.
d of either cost leadership or product differentiation, depending upon the strategy chosen.

18. Quiz