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Strategy
- Strategy describes how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its overall objectives. - A thorough understanding of the industry is critical to implementing a successful strategy
Basic Strategies:
1. Product Differentiation 2. Cost leadership
Basic Strategies:
1. Product Differentiation an organizations ability to offer products or services perceived by its customers to be superior and unique relative to the products or services of its competitors - Leads to brand loyalty and the willingness of customers to pay high prices Cost Leadership an organizations ability to achieve lower costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost control - Leads to lower selling prices
2.
Implementation of Strategy:
Many companies have introduced a Balanced Scorecard to manage the implementation of their strategies
1. Market share 2. Customer satisfaction 3. Customer retention percentage 4. Time taken to fulfill customers requests
1. Manufacturing capabilities 2. Number of new products or services 3. New product development time 4. Number of new patents
Evaluating Strategy
Strategic Analysis of Operating Income three parts: 1. Growth Component measures the change in operating income attributable solely to the change in the quantity of output sold between the current and prior periods. 2. Price-Recovery Component measures the change in operating income attributable solely to changes in prices of inputs and outputs between the current and prior periods
Evaluating Strategy
Strategic Analysis of Operating Income 3. Productivity Component measures the change in costs attributable to a change in the quantity of inputs between the current and prior periods
$26,400,000
Assume that for 2012, FWB produced and sold 1,000,000 units at $26 per unit. During the year 2013, FWB produced and sold 1,100,000 units at $24 per unit. What is the revenue effect of growth?
Growth Component
Revenue effect of growth component = (Actual units of output sold in 2013 Actual units of output sold in 2012) Output price in 2012 (1,100,000 1,000,000) $26 = $2,600,000 F This component is favorable because it increases operating income.
Growth Component
Cost effect of growth component = Actual units of input or capacity that have been used in 2012 to produce year 2013 output assuming the same input-output relationship that existed in 2012 Actual units or capacity to produce 2012 output X Input prices in 2012
Growth Component
To produce 1,100,000 units in 2013 compared with the 1,000,000 units produced in 2012 (a 10% increase), Dallas would require a proportional increase in direct materials. Assume that 3,000,000 square centimeters of materials were used to produce the 1,000,000 units in 2003 at a cost of $1.35 per square centimeter.
Growth Component
Assume that manufacturing conversion costs, selling and customer service costs and research and development costs were $16,000,000 and remained stable during 2013. What is the cost effect of the growth component? 3,000,000 110% = 3,300,000 centimeters (3,300,000 3,000,000) $1.35 = $405,000 U
Price-Recovery Component
Revenue effect of price-recovery component = (Output price in 2013 Output price in 2012) Actual units of output sold in 2013 What is the revenue effect of the price-recovery component? ($24 $26) 1,100,000 = $2,200,000 U
Price-Recovery Component
Cost effect of price-recovery component = (Input prices in 2013 Input prices in 2012) X Actual units of inputs or capacity that would have been used to produce year 2013 output assuming the same input-output relationship that existed in 2012 * Assume that in the year 2013, direct materials costs were $1.31 per square centimeter.
Price-Recovery Component
What is the cost effect of the price-recovery component? ($1.31 $1.35) 3,300,000 = $132,000 F
Revenue effect of price-recovery component $2,200,000 U Cost effect of price-recovery component 132,000 F Decrease in operating income due to price-recovery component $2,068,000 U
Productivity Component
Productivity component = Actual units of inputs or capacity to produce year 2013 output - Actual units of inputs or capacity to produce year 2013 output X Input prices in 2013
Productivity Component
Assume that 2,772,000 actual square centimeters of direct materials were used in the year 2013. Actual price was $1.31/square centimeter.
Productivity Component
What is the productivity component of cost changes?
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