1. Economics of Strategy Analyzing Cost and Differentiation Positions

2. Analyzing Cost Positions Two major methods –disaggregate the various cost measures –identify cost drivers

3. Disaggregating Costs by behavior by classes of inputs by activity

4. ...by behavior Useful for decision-making, particularly exit and entry decisions Classify as fixed, variable, or semi-fixed costs Focus on time framework for the particular decision

5. …by classes of inputs Traditional Accounting –manufacturing expenses Direct material costs + direct labor costs+ indirect manufacturing costs –non-manufacturing expenses selling, advertising, promotion, administrative, R&D Usually reported as SGA (selling and general administrative expenses)

6. Direct Material Costs costs of materials found in the final product –beer hops, sugar, yeast, water, bottles, caps

7. Direct Labor Costs costs of labor traceable to the physical production of the product

8. Indirect Manufacturing Costs all costs not in the above two categories –indirect labor costs –materials overhead –general factory administrative personnel –facilities and equipment costs –engineering costs

9. Activity-Cost Analysis Assign costs to activities in the value chain McKinsey Business System Framework –technology –product design –manufacturing –marketing –distribution –service

10. Cost Drivers those related to firm size or scope those related to cumulative experience those independent of firm size or scope or cumulative experience those related to the organization of transactions

11. Cost Drivers - firm size or scope economies of scale economies of scope

12. Cost Drivers - cumulative experience learning curves

13. Cost Drivers - not related to scale, scope, or cumulative experience input prices location economies of density complexity/focus

14. Cost Drivers - not related to scale, scope, or cumulative experience process efficiency discretionary policies government policies

15. Cost Drivers - organization of transactions Holdup Leakage of private information Coordination problems Agency Costs

16. Suggestions View the firm as a collection of activities –cost savings can come from factors affecting the activity itself –cost savings can come from a rearrangement of the flow or order of the activities Technology almost always provides opportunities for cost reductions and if it doesn't yield them it will soon be gone

17. Analyzing Benefit Drivers increase perceived benefits to consumers five major categories of drivers

18. Physical characteristics performance quality durability features ease-of-use aesthetics, color, style

19. Ancillary Characteristics service after the sale –warranty –customer service –product training –support services

20. Sale or Delivery Characteristics conditions for financing the product spatial location of sales facilities speed of delivery conditions of delivery return policies pre-sale product explanations

21. Consumer expectations/perceptions stability of the company customer loyalty

22. Subjective image psychological attachments formed by –peer groups –advertising –packaging –labeling –popularity –culture

23. Analyzing Benefit Drivers Customer Perception Map –p. 524, figure 13.5