Historical philosophical, theoretical, and legal foundations of special and i...
Strategic Cost Management
1. Introduction to SCM Page 1
Introduction to SCM
Topic 1: Traditional Cost Management 2
Topic 2: Traditional V/S Strategic Cost Management 4
Topic 3: Strategic Cost Management 5
Topic 4: Superior Performance & Competitive Advantage 24
Topic 5: Assessing Competitive Advantages Using Value Chain Approach 26
Topic 6: Vision, Mission And Objectives Of Scm 28
Topic 7: Value Shop Model Or Service Value Chain 29
Topic 8: Role Of Management Accountant 30
Topic 9: Case Studies 31
2. Introduction to SCM
Topic 1:
Traditional cost management system involves
allocation of costs and
focuses largely on cost control and cost reduction;
comparing actual results
analysing the differenc
taking corrective action to ensure future outcomes are within the budgeted
outcomes.
The underlying assumption was that with reduced costs (direct) and overheads a firm could
earn better profits.
Limitations of Traditional Cost Management
It has a short-term
outlook e.g. saving costs
on an annual basis.
Traditional cost
management is a
reactive approach to
cost management
Topic 1: Traditional Cost Management
Traditional cost management system involves
allocation of costs and overheads to the production;
cost control and cost reduction;
comparing actual results with the standard expectations; and
ing the difference (known as variance analysis) and it’s reporting
corrective action to ensure future outcomes are within the budgeted
The underlying assumption was that with reduced costs (direct) and overheads a firm could
onal Cost Management:
Traditional cost management
system has internal focus and does
not look at the external factors of
competition, market growth,
customer requirement etc.
There is a limited focus on
review and improvisation of
existing processes and activities.
An excessive focus on cost
reduction could impact the
quality of product and serv
and alienate the customers a
systems rely on accounting data
Page 2
and it’s reporting
corrective action to ensure future outcomes are within the budgeted
The underlying assumption was that with reduced costs (direct) and overheads a firm could
An excessive focus on cost
reduction could impact the
quality of product and services
and alienate the customers and
results in lower sales and
profitability.
Traditional cost accounting
systems rely on accounting data
which can be misleading at
times. It does not consider
dynamics of marketing and
economics.
If a company targets to reduce
the marketing spend by, say,
20% across the all product
categories, it is likely that the
sales of profitable products is
also impacted.
3. Introduction to SCM Page 3
1 pen cost Rs. 100 hai. Iss 100 m mat+ labor+OH hogy i.e. Traditional cost
Management involves allocation of cost to its production
Iss pen ki cost 100 se 80 krni hai. TCM focuses on cost control and cost reduction.
Par market mein yeh pen 70 ka bnta h i.e. Comparing the actual result with
standard expected.
Yeh 10 rs. Ka difference kyu ha i.e. analysis of difference and it’s reporting
Diff ka reason mila to kya kare- toh report it and take corrective action so to
ensure that future outcomes align with the standard.
Abb since basic assumption hi h cost reduction toh isse 2 chize pta chli h
ki short term outlook i.e. focus on cost saving on annual basis and too
much focus on cost reduction which could impact the quality of product
and services and alienate the customers and results in lower sales and
profitability.
Abb cost par itna focus h toh hum ignore kar dete h two important chize
ek toh limited focus on review and improvisation of existing processes
and activities and ignore dynamics of market and economy as we rely
on accounting data.
Hum sochte h ki jab kuch hoga tab dekhgy i.e. reactive approach and iss
reason se hum internal focus rkhte h and we ignores external factors of
competition, market growth, customer requirement etc.
4. Introduction to SCM Page 4
Topic 2: Traditional v/s Strategic Cost Management
Yaad krne ke bahane
Jo traditional cost management ke limitations hai......wahi
points hai...yaha bhi....except cost.
Driver and objective.
1. Short term outlook i.e. Time Span
2. Too much focus on cost reduction i.e. cost reduction
3. Reactive approach i.e. Approach
4. Focus on internal factors only i.e. focus
5. Objective i.e. key points ki TCM on profitability and
SCM on sustainable competitive advantages.
6. Cost driver- yeh hi bus alag sa hai
5. Introduction to SCM Page 5
Topic 3: Strategic Cost Management
A strategy is a set of actions taken by managers of a company to increase the company’s
performance. In General term, it is bundle of steps to achieve a long term objectives.
Strategic cost management is the application of cost management techniques so that they
improve the
strategic position of a business
control costs.
It also involves integrating cost information with the decision-making framework to support
the overall organisational strategy. It focuses on continuous improvement to deliver
superior quality product to the customers.
It needs to include all aspects of the production, purchase, design, manufacturing, delivery
and service and shall be involved at early stages of a product development cycle.
For Example: Reliance Jio has used the strategy + cost to build a competitive advantage in
the telecom sector.
Objectives of SCM: The basic aim is to achieve the sustainable competitive advantage
through
product differentiation; and
cost leadership
5 Necessities of Strategic Cost Management
It is cost analysis in a broader context where the strategic elements become more
important in strengthening the strategic and existing position of the company.
Cost data is analysed and used strategically to develop alternate measures to gaining
sustainable competitive advantages.
[Routine Maintenance vs Non Routine Maintenance]
[Closure of Service Centre]
6. Introduction to SCM Page 6
SCM gives a clear understanding of the company’s cost structure in search of
sustainable competitive advantage.
SCM is the managerial use of cost information explicitly directed to the four stages of
strategic management – formulation, communication, implementation and control.
4 stages of Strategic Cost Management
Strategic cost management can be referred to as “the managerial use of cost information
explicitly directed at one or more of the four stages of strategic management”:
Formulate strategies (Banao)
Communicate those strategies throughout the organization (Batao)
Implement strategies by developing and carrying out tactics (Karwao)
Developing and implementing controls to monitor the success of objectives
(sudharwao)
SCM helps in overall recognition of cost relationships among the activities in the
value chain and the process of managing these relationships to the company’s
competitive advantage.
3 components of Strategic Cost Management
(a) Strategic Positioning Analysis (Where you are standing?)
Strategic Positioning Analysis is a company’s relative position within its industry matters for
performance.
Strategic Positioning Analysis is concerned with impact of external and internal environment
on the overall strategy of a company.
Strategic Positioning of an organization depends on 3 factors. Those are:
(b) Cost Driver Analysis
Cost is caused or driven by various factors which are interrelated. Cost Driver either
increases or decreases the cost of manufacturing product or rendering of services.
PESTLE Control
Industry Analysis
SWOT Analysis
SCM cost analysis h > taki alternate measures mil sake humko > fir humko cost structure mil jta h
organization ka > fir hum uss information ko managerial use krte h > fir recognize kr dete h use value chain
ke sath.
7. Introduction to SCM
(c) Value Chain Analysis
Value-chain analysis is a process by which a firm identifies & analyses various
add value to the final product.
Focus (Benefit) of value Chain analysis
to the final product/service and eliminate such non
It depicts how customer value accumulates along with a chain of activities that lead to an
end product or service.
Cost driver concept is explained in two broad ways:
Structural Cost Drivers
• Structural
directly
• Examples
Scale
Experience
complexities
Executional
• Executional
decision
achieve
• These
and
• The
improvement,
efficiency
executional
All costs drivers might not be important at all times. A company must focus on those cost
drivers which is of strategic importance.
chain analysis is a process by which a firm identifies & analyses various
add value to the final product. Here, Value is utility as compared to competitors.
of value Chain analysis is to identify those activities which do not add value
to the final product/service and eliminate such non-value adding activities.
It depicts how customer value accumulates along with a chain of activities that lead to an
Cost driver concept is explained in two broad ways:
Structural Cost Drivers
Structural cost drivers are the organisational factors
directly affect the costs of a firm’s products.
Examples of Organizational Fcators are:
Scale and scope of operations, Economics
Experience or learning curve, usage of technologies
complexities of operations
Executional Cost Drivers
Executional cost drivers are based on firm’s operational
decision on how the various resources are employed
achieve the goals and objectives.
These cost drivers are determined by management
policy.
participation of workforce towards continuous
improvement, importance of total quality management,
efficiency of plant layout etc. are examples
executional cost drivers
All costs drivers might not be important at all times. A company must focus on those cost
drivers which is of strategic importance.
Page 7
chain analysis is a process by which a firm identifies & analyses various activities that
to competitors.
to identify those activities which do not add value
ing activities.
It depicts how customer value accumulates along with a chain of activities that lead to an
factors which
of scale,
technologies or
operational
employed to
management style
continuous
management,
examples of
All costs drivers might not be important at all times. A company must focus on those cost
Long Term
in nature
Dynamic in
nature
8. Introduction to SCM Page 8
1
Primary activities are the activities that are directly involved in transforming inputs into
outputs and delivery and after-sales support to output. It includes:
Support Activities include:
1
Above points are suitable for manufacturing industry. In case of trading industry or business refer S Mart Case study
Inbound Logistics: These are activities concerned with receiving, storing, and
distributing the inputs (raw materials) to the production process. The relationship with
suppliers is a key component in this process.
Operations: These activities involve transforming inputs into final product. Activities
such as machining, packaging, testing and equipment maintenance form part of
Operations.
Outbound Logistics: These activities involve collecting, storing and distributing the
products from the factory line to end consumers. This may include finished goods
warehousing, delivery vehicle operation, order processing and scheduling.
Marketing and Sales: Marketing and Sales provide the means by which the customers
are made aware of the product. The activities include advertising, promotion,
distribution channel selection, sales force management and pricing policy.
Service: This includes activities related to after sales service like Installation, repair and
parts replacement.
Procurement involves purchasing of raw
material, supplies and other
consumables required as inputs for the
primary activities.
Technological Development includes
technical knowledge, equipment,
hardware, software and any other
knowledge which is used in the
transformation of inputs to outputs.
Human Resource Management includes
activities around selection, recruitment,
placement, training, appraisal, rewards
and promotion; management
development; and labour/ employee
relations.
Firm Infrastructure consists of activities
such as planning, finance, accounting,
legal, government affairs and quality
management.
9. Introduction to SCM Page 9
Porter describes the value chain as “internal processes or activities a company performs to
design, produce, market, deliver and support its product.”
He further stated that “a firm’s value chain and the way it performs individual activities are
a reflection of its history, its strategy, its approach of implementing its strategy, and the
underlying economics of the activities themselves”.
Story for Value chain analysis
1. Sabse phle hum raw material laayegy i.e. procurement of
raw material
consumables
other supplies
2. Fir we will
receive that material,,
store it and
distribute it to production team i.e. Inbound logistics
3. Fir Labour ki need hogi toh Human Resource wale ko bolegy. HR wala
Selection kregya resumes ka
Recruitment krega
Placement hogi fir i.e. Job assign krega
Training dega
Ek management team develop hogi
Management- employee relation develop hogy
Appraisal and rewards dega
4. Fir technological development hoga i.e. technical knowledge of
equipment,
hardware,
software and
any other knowledge which is used in the transformation of inputs to
outputs.
5. Ek firm infrastructure hoga that will include activities such as
planning,
finance,
accounting,
legal,
government affairs and
quality management.
Limitation of Porter Value Chain Analysis: It does not
apply in case of service industry.
10. Introduction to SCM Page 10
6. Fir operation shuru hoga jaha
input will be transformed as output and
machining,
packaging,
testing and
equipment maintenance involve hoga.
7. Outbound Logistics i.e. Fir fir finish good ko
collect kiya jayega (delivery vehicle lagegy),
store kiya jayega (warehousing) and
maal distribute hoga (scheduling and processing of order).
8. Fir for awareness
marketing hogi like advertisement and promotion and
sales hoga via distribution channel, pricing policy etc.
9. Fir after sales services like installation, repair, part replacement etc.
11. Introduction to SCM Page 11
Case Study (ICAI): Manufacturing Activity
ABC Ltd. is engaged in business of manufacturing branded readymade garments. It has a
single manufacturing facility at Ludhiana. Raw material is supplied by various suppliers.
Majority of its revenue comes from export to Euro Zone and US.
To strengthen its position further in the Global Market, it is planning to enhance quality and
provide assurance through long term warranty. For the coming years company has set
objective to reduce the quality costs in each of the primary activities in its value chain.
Required:- State the primary activities as per Porter’s Value Chain Analysis in the value chain
of ABC Ltd with brief description.
Answer:
Primary activities are the activities that are directly involved in transforming inputs into
outputs and delivery and after-sales support to output. Following are the primary activities
in the value chain of ABC Ltd.:-
(i) Inbound Logistics: These activities are related to the material handling and
warehousing. It also covers transporting raw material (yarn or fabric) from the supplier
to the place of processing inside the factory at Ludhiana.
(ii) Operations: These activities are directly responsible for the transformation of yarn or
fabric into final readymade garments for the delivery to the consumers.
(iii) Outbound Logistics: These activities are involved in movement of readymade garments
to the point of sales. Order processing and distribution are major part of these
activities.
(iv) Marketing and Sales: These activities are performed for demand creation and customer
solicitation. Communication, pricing and channel management are major part of these
activities.
(v) Service: These activities are performed after selling the goods to the consumers. i.e.
replacing after a couple of sessions.
Case Study (Trading Sector)
S Mart – a departmental store – caters entire household requirements (from grocery to
clothing) – have their 100th
Store in 2017. S Mart known for high quality products – discount
of 5% across products – Sales grow @30% Y0Y basis – highest profit margin and ROE in
industry.
S Mart have tie ups with more than 500 vendors – pays all suppliers in advance – hence
enjoy preferential pricing – procurement of inventory using JIT – keep inventory level low –
save working capital – own vehicles for direct delivery from vendors to store – therefore, no
warehouse requirement – since household item has high demand – inventory moved out
faster – no franchisee system – all store under own brand – hence no intermediaries.
Do need based marketing – focus in superior quality products and high level customer
services – build customer loyalty – have low employee turnover in industry – high motivated
employees – reward to employees through ESOP – regular training sessions – results in
company’s growth – have Solid IT infrastructure for all activities and in all departments –
implemented SAP ERP – various reports available to the top management on real time basis.
12. Introduction to SCM Page 12
Question:
MAP various activities of S Mart on Porter’s Value Chain Model.
Answer:
Define value chain and its focus and one benefit
For focus link with the given case like a wasteful activity could be unnecessary storage of
inventory which increases the working capital requirement.
Start with – Porter Value Chain classifies the activities into primary and secondary
activity
Define Primary Activity i.e. those activities that are directly related with creating and
delivering a product to the end customer
Inbound logistics – involves arranging inbound movement of raw material/finished
goods from suppliers to manufacturing plant/retail stores.
In given case, S-Mart is not involved in manufacturing thereby all the activities
undertaken to deliver the products to its retail stores would form part of inbound
logistics.
The company has its own transport mode to ensure timely delivery of products to the
retail stores. The company also has a JIT system in place which ensures minimum
inventory level.
Yaha company ko apne vehicles ki routine maintenance krwani chahiye humesha – taki logistics mein prb
na ho.
Operations – involve those activities which are concerned with running of stores,
planning of inventory levels of various products, deciding the layout of various stores etc
in case of retail business.
The company operates 100 stores under his own brand and does not have franchisee
model for operation of its stores.
The ownership of the stores ensures that quality standard was maintained across
various stores and there is no risk of closing of an outlet due to expiry of lease
arrangements.
Company ke agar khud ke store ni hai – toh uss case mein – inventory dekhna apne customers par – lease
arrangement dekhna ki woh expire na ho – and customer relationship banana imp hai.
Outbound Logistics - involves collecting, storing and distributing the products from the
factory line to end consumers. This may include finished goods warehousing, delivery
vehicle operation, order processing and scheduling.
In the given case, S Mart, directly delivers to the product to store from own vehicles.
Thereby there is no warehousing requirement.
The customers directly pick up the products from store. The company must ensure that
waiting time of invoicing and checkout is low.
Agar suppose khud ke vans ni h – toh aise transport ko lo – jo timly service deta ho and uska track record
acha ho.
13. Introduction to SCM Page 13
Marketing and Sales - provide the means by which the customers are made aware of
the product. The activities include advertising, promotion, distribution channel selection,
sales force management and pricing policy. .
The company does not spend much on marketing as it believes in building customer
loyalty by offering high quality products.
Service - In case of retail stores, service would encompass a superior experience at the
stores and managing return of products by the customers.
S-Mart aims to build customer loyalty through high level of customer service at its store.
Define Secondary Activity i.e. those activities which supports the primary activities in their
functions
Procurement – involves purchasing of raw material, supplies and other consumables
required as inputs for the primary activities.
The company deals with more than 500 vendors on advance payment basis for the
procurement of high quality and superior products. Advance payment allows it to avail
the discount and pass it on to the customer.
Procurement ke liye – supplier management is important – bcoz following JIT system ki woh exact date
and time par maal bheje – quality achi ho yeh ussi key yaaha assure kr le etc.
Technology Development - Technology spans across all the primary activities of an
organisation. It includes activities like process automation, an Enterprise Resource
Planning (ERP) system, inventory management systems etc.
The company has solid IT infrastructure for all of its activities. It has implemented ERP
System which provides reports on real time basis of all the departments (especially
inventory).
The system ensures the seamless flow of product from order placement till delivery to
customer.
Like to use aisi technology – jo P&G and walmart ne use ki thi – taki jab inventory low ho – khud P&G ko hi
pta chl jaye.
Human Resource Management - includes activities around selection, recruitment,
placement, training, appraisal, rewards and promotion, management development and
labour/ employee relations.
S Mart has lowest employee turnover ratio among the industry. They provide reward to
employees by way of ESOP. Employees are also trained on regular basis ensuring the
growth of the company.
Workforce management use krna chahiye – workers ko sab bta kr rakhna chahiye – taki woh bhi active
rahe and organizational policy ke hisab se kam kare. Plus time to time training toh honi hi chahiye.
Infrastructure - consists of activities such as planning, finance, accounting, legal,
government affairs and quality management. All these are important for organization
performance in primary activities.
14. Introduction to SCM Page 14
Case Study – Hotel Industry
Staywell Hotels – near Mumbai airport – accommodate cost conscious travellers – for short
duration – like 1 to 2 days.
Provide room – with – comfortable beds, high speed internet, AC facility – coffee machine –
fridge and TV service. Food service based on limited menu provided on the premises. Have
conference rooms for business meetings – free shuttle services to and from airport.
Outsourced cleaning services and food services to specialized vendors – cleaning services
include cleaning of kitchen, crockery, bedding, laundry and housekeeping of premises.
Vendor services has been satisfactory – however few instances – unhygienic rooms or non
palatable food services. However this not a hindrance due to – high guest volume and quick
turnover of guests
Sizable market share – but competition increasing – leading to price wars – and pressure on
profits. Map Value Chain w.r.t Primary Activities.
Inbound Logistics
In the case of Staywell Hotels, materials would include food service received from the
vendor. This needs to be stored and maintained properly until the item is ordered by the
guest. Similarly, the vendor delivering freshly laundered crockery, bedding and laundry
would be materials that need to be stored until their use to serve the guests. These are
inbound logistics for the hotel.
Operations
In the case of Staywell Hotels, operations would include maintenance of hotel premises
including guest rooms, conference rooms and common area.
Activities related to ensuring cleanliness and safety of rooms, working order of facilities
offered like TV and internet service, coffee machines, shuttle service are part of hotels
operations.
Outbound Logistics
In the case of Staywell Hotels, the food should be prepared in a professional manner, stored
in such a way that it ensures customer satisfaction and safety.
The review of food items to remove the ones past expiry would be part of Outbound
Logistics. Therefore, any activity relating to making sure that the guests get what they have
ordered for, would be part of outbound logistics.
Marketing and Sales
In the case of Staywell Hotels, advertising its properties to the cost and time conscious
traveller would be a marketing activity.
Free shuttle service is a promotional activity to attract guests. Any agreement with airline
companies to accommodate guests would also form part of this activity.
Service
In the case of Staywell, service is one of the most important activities in their value chain
model. Good service ensures happy guests. Therefore, all activities from front-desk, room
service, catering, repair services, shuttle service would be included here. All employees have
to trained to handle needs of the guests in an effective and efficient manner.
15. Introduction to SCM Page 15
Extra Information (for concept)
Cost Drivers of Value Chain Analysis
Economies of scale
Learning and spillovers
Pattern of capacity utilization
Linkages
Interrelationships
Integration
Timing
Organization policies
Location
Institutional factors
Porter’s generic model identifies three general steps in value chain analysis
the initial evaluation of tasks,
the location of areas of cross-functionality, and
the discovery of dynamic areas of opportunity.
Advantages of Value Chain Analysis
identify those activities where you can quickly reduce cost, optimize effort, eliminate
waste, and increase profitability
gives insights into elements that bring greater value to the end user
identifying activities that are better served by outsourcing — those that are not a
core competency, result in process improvements, or are less expensive when
performed by external suppliers
After outsourcing organization can advocate the need for greater or more expensive
resources that increase product value, develop loyalty, or create differentiation from
your competition
Disadvantages of Value Chain Analysis
Difficulties involve gathering data (which can be labor and time-intensive),
identifying the tasks or functions that can add perceived or real value, and
developing and deploying the plan
not always easy to find appropriate information in order to break your value chain
down into primary and supporting activities.
Value Chain Implementation
Approaches that focus on discovering cost advantages and disadvantages include:
Identifying primary and supporting activities
Rating the importance of each activity in providing value to the product or service
16. Introduction to SCM Page 16
Identifying the cost drivers that cause a change in the activity cost
Identifying linkages and dependencies
Identifying cost reduction and value improvement opportunities
Approaches with a focus on finding differentiation include:
Identifying activities that create value for your customers
Identifying differentiation activities that improve customer value
Identifying the best opportunity for differentiation
Value Chain Analysis tips
Require team efforts
Obtain customer feedback
Decide between cost reduction and product differentiation
Minimize any and all waiting time
Standardize processes whenever possible
Communicate timeline to stakeholders
Case study: Starbucks and Value chain
Primary Activities
Inbound Logistics
The inbound logistics for Starbucks refer to company-appointed coffee buyers selecting the
finest quality coffee beans from producers.
In the case of Starbucks, the green or unroasted beans are procured directly from the farms
by the Starbucks buyers.
These are transported to the storage sites, after which the beans are roasted and packaged.
They are then sent to distribution centres, a few of which are company-owned and some of
which are operated by other logistic companies.
The company does not outsource its procurement, ensuring high-quality standards right
from the point of selection of coffee beans.
Operations
Starbucks operates in more than 75 markets, either in the form of direct company-owned
stores or licensees. Starbucks has more than 24,000 stores internationally.
According to its annual report, the company generated 79% of its total net revenue during
the fiscal year 2017 from its company-operated stores while the licensed stores accounted
for 10.5%.
Outbound Logistics
There is very little or no presence of intermediaries in product selling. The majority of the
products are sold in their own or in licensed stores only. As a new venture, the company has
17. Introduction to SCM Page 17
launched a range of single-origin coffees, which will be sold through some leading retailers
in the U.S.
Marketing and Sales
Starbucks invests more in superior quality products and a high level of customer service
than in aggressive marketing.
However, need-based marketing activities are carried out by the company during new
products launches in the form of sampling in areas around the stores.
Service
Starbucks aims at building customer loyalty through its stores' customer service. The retail
objective of Starbucks is, to be the leading retailer and brand of coffee in each of our target
markets by selling the finest quality coffee and related products, and by providing each
customer a unique Starbucks Experience.
Support Activities
Infrastructure
This includes departments like management, finance, legal, etc., which are required to keep
the company’s stores operational. Starbucks' well-designed and pleasing stores are
complemented with good customer service provided by the dedicated team of employees in
green aprons.
Human Resource Management
The committed workforce is considered a key attribute in the company’s success and
growth over the years. Starbucks employees are motivated through generous benefits and
incentives.
The company is known for taking care of its workforce, a key reason for a low turnover of
employees, which indicates great human resource management.
There are many training programs conducted for employees in a setting of a work culture
which keeps its staff motivated and efficient.
Technology Development
Starbucks is very well-known for the use of technology, not only for coffee-related processes
(to ensure consistency in taste and quality along with cost savings) but to connect to its
customers.
Many customers use Starbucks stores as a makeshift office or meeting place because of free
and unlimited WiFi. Back in 2008, the company launched a platform where customers could
ask questions, give suggestions and openly express opinions and share experiences; the
company has implemented some of the suggestions, including for its rewards program, from
this forum.
Starbucks also uses Apple’s iBeacon system, wherein customers can order a drink through
the Starbucks phone app and get a notification of its readiness when they walk in the store.
18. Introduction to SCM
3 strategic frameworks for value chain
(a) Industry Structure Analysis
Michael Porter developed a five factors model as a way to organise information about an
industry structure to evaluate its potential attractiveness
Factors which affect the profitability are:
• The bargaining power
push the price down
• when the bargaining
dictate terms to the
• To protect organization
on a single buyer.
Bargain power of buyers
• The bargaining power
important to the buying
input
• The profitability of
bargaining power.
• To protect organization
on a single supplier
the dependancy from
Bargain power of supplies
• When multiple and
particular product,
likely to switch suppliers
• This threat may arise
in which organization
• A firm in such a case
differentiation to retain
Threat of substitute prodcuts or services
for value chain
Industry Structure Analysis (Porter’s 5 Forces)
ichael Porter developed a five factors model as a way to organise information about an
industry structure to evaluate its potential attractiveness.
Factors which affect the profitability are:
power of buyers generally determines the ability
down
bargaining power of buyers is high, they would be in a
firm
organization from this threat, an organization should
Bargain power of buyers
power of supplier is relatively higher when the
buying firm or when there are very few suppliers
companies can shrink if the suppliers have
organization from this threat, an organization should
supplier and may also look for backward integration
from the supplier.
Bargain power of supplies
and close substitutes are available in the market
and that too on a cheaper price, then customers
suppliers easily.
arise either within the industry or outside from the
organization is operating.
case must resort to competitive pricing and
retain its customers.
Threat of substitute prodcuts or services
Requirements of Value
Chain (before VCA)
Page 18
ichael Porter developed a five factors model as a way to organise information about an
ability of buyer to
a position to
not depend
the input is
suppliers of the
have a higher
not depend
integration to reduce
market for a
customers are
the industry
and product
Requirements of Value
(before VCA)
19. Introduction to SCM Page 19
(b) Core Competencies Analysis
Core Competency is a distinctive or unique skill or technological knowhow that creates
distinctive customer value. A core competency is the primary source of an organisation’s
competitive advantage.
2 ways to achieve it:
Unique Skills; and
Technical know how
3 tests to identify it:
• The threat of new entrants largely depends on the barrier to entry and
perceived profitability in an industry.
• If an industry is profitable and the barriers to entry are low, new firms could
enter the industry leading to excess supplies and reduced prices.
• An organization must look for continuous improvement i.e. Kiazen to
safeguard itself from the new entrants.
Threats of new entrants
• The competitive rivalry is higher when an industry has high number of firms
and is lower when there are few large players dominating the market
• The intensity of competition is higher:
• When firms are of more or less equal size.
• Extra capacity exists in the industry
• Difficulty in differentiation in the products.
• High exit barriers
• Higher fixed costs
Insensity of competition/ rivalry amongest firms
Since it is not impossible to imitate core
competency, organization shall keep evolving
its core competency.
20. Introduction to SCM Page 20
2 sources to create it:
Resources: Resources are factors that enable a company to create value for
customers. They can be tangible or intangible. The more difficult a resource is to
imitate, the more valuable is the resource for the company.
Capabilities: Capabilities refer to the company’s ability to co-ordinate resources and
put them to productive use.
4 ways of using it with value chain (Advantages of core competencies):
Validate core competencies in current businesses i.e. to check whether core
competencies exist continuously. (like gardener wala story)
Leverage competencies to the value chains of other existing businesses i.e. a core
competency in one segment of business can be used in another existing/new
business.
For example: Pulse Toffee by DS Group. Here, DS Group uses it’s core competencies
i.e. distribution network to achieve a record sale.
Use core competencies to reconfigure the value chains of existing businesses i.e.
using core competencies to reconfigure the value chain to improve payoffs.
Otherwise, competitors may exploit opportunities. (like food bazaar Kolkata- veg kat ke
deta tha)
Use core competencies to create new value chains i.e. with strong core
competencies in its existing businesses, an organisation can seek new customers by
developing new value chains.
For Example: Jio Gst Software by the Reliance Jio.
(c) Segmentation Analysis
Segmentation analysis means in how many segments, a business can be in divided. Motor
vehicle industry, for example, can be seen as a composite of tyre, glass, battery, metals etc.
Not all firms in an industry participate in all segments.
5 steps of how to do it:
I. Identify segmentation variables and categories: An industry might be divided into
multiple segments depending upon the nature and complexity of the industry. The
segmentation could be based on the nature of products or geographies or customers.
II. Construct a segmentation matrix: After the segments are identified, a segmentation
matrix can be created based on products, distribution channels, geographies etc.
21. Introduction to SCM Page 21
For example: ITC could create a matrix based on the nature of products (Cigarettes,
Hotels, Textile, Paper etc.) and geographies (North, East, West and South).
Another way could be to create a matrix using products and distribution channel
(wholesale, retail or direct).
III. Analyse segment attractiveness: The segmentation matrix could be used to evaluate
profitability and performance of each of the segment.
The interrelationship between various segments must also be considered while
analysing segmental attractiveness.
IV. Identify key success factors for each segment: Each segment identified must be assessed
with a relevant measure of performance. It could be quality of product, service,
timeliness of delivery etc.
A single performance measure across all segments is not advisable. Also, a measure
which suits the service segment will not suit the manufacturing segment.
V. Analyse attractiveness of broad versus narrow segment scope: The Company must
identify whether it wants to be in a broad segment or a narrow one.
The competitive advantage of each segment may be identified in terms of low cost
and/or differentiation.
22. Introduction to SCM
Case Study (ICAI)
Solution:
How to evaluate company strategy of entering in paper tube business
forces
What are porter 5 forces and allow they are in align with given case?
Conclusion on industry
How to evaluate company strategy of entering in paper tube business
What are porter 5 forces and allow they are in align with given case?
Conclusion on industry scenario and then decision whether to enter or not?
Page 22
How to evaluate company strategy of entering in paper tube business? – Porter’s 5
What are porter 5 forces and allow they are in align with given case?
to enter or not?
23. Introduction to SCM
Additional Points
High supply of product leading to lower pr
bargain.
Durability difference of plastic and paper boxes
in consumer demand
of product leading to lower price and providing buyer an opportu
Durability difference of plastic and paper boxes – provide high chances of
Page 23
ding buyer an opportunity to
provide high chances of future shift
24. Introduction to SCM Page 24
Topic 4: Superior Performance & Competitive Advantage
(How to derive competitive advantage?)
The company’s profitability is improved with superior performance which leads to the
maximisation of shareholder’s wealth.
In order to survive and prosper in an industry, firms must meet 2 criteria:
They must supply what customers want to buy and
They must survive competition.
A firm’s overall competitive advantage derives from the difference between the value it
offers to customers and its cost of creating that customer value.
Porter’s 2 Generic Strategies
(a) Low Cost Advantage (Cost Leadership)
Advantages of Low Cost: relative cost advantage enables a business to do one of the
following
Charge a lower price than its competitors for its product or services in order to gain
market share and still maintain current profitability; or
Match with the price of competing products or services and increase its profitability.
Ways of achieving low cost:
access to low-cost raw materials
achieve economies of scale
innovative process technology
low-cost access to distribution channels or customers; and
superior operating management
Value chain analysis can identify the points at which Low Cost Advantage can be achieved:
Reduce costs by copying rather than creating designs, using cheaper materials and
other cheaper resources, reducing labour costs and increasing labour productivity.
Attaining economies of scale by high-volume sales.
Use high-volume purchasing to get discounts for bulk purchase.
Locating in areas where cost advantage exists or government support is possible.
Gaining learning and experience curve benefits.
Disadvantages of low cost:
Intimate i.e. competitors might find way to lower their costs as well
Lower quality of product i.e. managers might try to lower costs by compromising the
quality of products
Solution:
a company which pursues a cost leadership strategy must continuously improve its
cost structure
25. Introduction to SCM Page 25
(b) Differential Advantage (Product Differentiation)
Q = Quality and its 8 dimensions
I = Innovation
S = Service
P = Price – follows automatically – if QIS done
Ways of achieving product differential:
Superior Quality: The customers should be offered a better-quality product in the
similar price range. The quality of product or service offering helps the company to
become a preferred choice of its customers.
Superior Innovation: The Company shall continuously offer innovative products
ahead of its competition.
Superior Customer Responsiveness: The Company shall produce products or
provides services which are aligned with customer’s expectation. It shall also focuses
on overall customer service and works towards parameters like reducing waiting
time, on time delivery etc.
Advantages of achieving product differential:
Increase price to recover extra cost of differential
Keep price same to capture market
Value chain analysis can identify the points at which Differentiation Advantage can be
achieved by:
Producing products which are superior to competitors by virtue of design, knowhow,
performance, etc. - Innovation
Offering superior after-sales service by outstanding distribution - Service
Expanding the product range - Differentiation
Superior packaging of the product - Quality
Making brand strength - Quality
26. Introduction to SCM
Topic 5: Assessing (evaluating)
The value chain approach can be used to better understand the compet
the following areas (VCA krne ke baad)
(a) Internal Cost Analysis (Almost ABC analysis)
Organisations can use the value chain analysis to understand the cost of processes and
activities and identify the source of profitability.
• The key is to classify
firm’s competitive advantage
• Firms might have distinctive
logistics.
Identify the firm’s value
• The next step is to trace
process identified.
Determine the portion
service attributable to
• The company identifies
driver leads to a change
• Once the factors driving
its cost management
• Multiple cost drivers
• The companies are using
resources consumed
Identify the cost drivers
• The cost improvement
cost in other processes
• For Example: An increase
but would also increase
Identify the links between
• Certain activities might
while other activities
or may be even at higher
• Using the value chain
board cuts and attempts
value-creating process
Evaluate the opportunities
advantage
(evaluating) Competitive Advantages using Value Chain Approach
The value chain approach can be used to better understand the compet
(VCA krne ke baad):
(Almost ABC analysis)
Organisations can use the value chain analysis to understand the cost of processes and
activities and identify the source of profitability.
classify activities to understand their true contribution
advantage.
distinctive advantage in procurement process
value-creating processes
trace or assign costs and assets to each value
portion of the total cost of the product or
to each value creating process
identifies the factors which drive costs. A change
change in the overall cost
driving costs are identified, business can assign
management activities.
drivers usually provide more useful information and
using ABC analysis to gain a better understanding
consumed and costs incurred for a certain activity.
drivers for each process
improvement programs in one value chain may lower
processes
increase in automation might reduce the manpower
increase the technology cost.
between processes
might provide a larger opportunity for reducing
activities might require that costs are incurred at current
higher levels.
chain approach, a company goes beyond simple
attempts to lower cost and improve efficiency within
process.
opportunities for achieving relative cost
Page 26
Competitive Advantages using Value Chain Approach
The value chain approach can be used to better understand the competitive advantage in
Organisations can use the value chain analysis to understand the cost of processes and
contribution to the
or inbound
value creating
change in cost
assign priority in
and analysis.
understanding of the
or increase
manpower cost
reducing costs
current level
across-the-
within each
27. Introduction to SCM Page 27
(b) Internal Differentiation Analysis (Re-engineering or Think Customer Oriented)
Companies can also use value chain analysis to create and offer superior differentiation to
the customers. The firms must identify and analyse the value creating process and carry out
a differentiation analysis.
Identify the customer’s value creating processes i.e. company must identify various
activities in its value chain which help in differentiation and structuring of value
chain.
Evaluate differentiation strategies for enhancing customer value i.e. following
strategies can be implemented to enhance the customer value:
o Superior features in product
o Using effective marketing & distribution channels
o Excellent Customer Service
o Having a superior brand image
o Offering better quality product at competitive prices
Determine the best sustainable differentiation strategies i.e. the activities which
could enhance differentiation must be identified. Selection of strategy must be
according to the availability of resources.
(c) Vertical Linkage Analysis
A company generates competitive advantage not only through linkages of internal processes
within a firm but also through linkages between a firm’s value chain and that of a suppliers
or users. A vertical linkage analysis includes
segmentation analysis,
supply chain reconfiguration,
backward or forward integration.
This implies that a company must have an understanding of not only its internal value chain
but also of the industry value chain.
Example - A company manufactures cars using various components like chassis, steering
wheel, tyres, axles etc. The company does not manufacturer all the components in-house
and are purchased from third party suppliers. The company focuses on assembly line which
is its core competency.
However, certain parts, which are critical to the car, are manufactured in-house. This is a
strategic choice to gain a competitive advantage.
28. Introduction to SCM Page 28
Topic 6: Vision, Mission and Objectives of SCM
Vision: A company’s vision is what the company would like to achieve. A company’s vision
statement must be challenging and shall states an ambitious future that can motivate
employees and managers.
Mission: Why does the company exist? The Mission statement of the organization must be
customer focused rather than product focused.
Objectives: A company’s objective or goal is a precise and measurable future state that the
company wants to achieve. The purpose of objective is to specify what needs to be done in
order to attain the company’s vision and mission.
How to set vision, mission and objective of SCM?
The fundamental purpose of strategic planning and management is to align the vision and
mission statements. A company’s strategy is directed towards achieving a sustained
competitive advantage. Strategic cost management is hence closely linked to the vision,
mission and objectives of the company.
Kya Bechogy? Kaha Bechogy?
Kisse Bechogy? Konse area m bechogy?
29. Introduction to SCM Page 29
Topic 7: Value Shop Model or Service value chain
This concept aims to serve companies from service sector. In value shop principle, no value
addition takes place. It only deals with the problem, figure-out the main area requires its
service and finally comes with the solution. This approach is designed to solve customer
problems rather than creating value by producing output from an input of raw materials.
The model has the same support activities as Porter’s Value Chain but the primary activities
are described differently. In the value shop they are:
Problem finding and acquisition.
Problem solving.
Choosing among solutions.
Execution and control/evaluation.
The management in a value shop focuses on areas like problem and opportunity
assessment, resource mobilization, project management, solutions delivery, outcome
measurement, and learning.
30. Introduction to SCM Page 30
Topic 8: Role of Management Accountant
The management accountant is traditionally considered the resident expert on
cost analysis;
cost estimation;
cost behaviour;
standard costing;
profitability analysis by product, customer or distribution channel;
profit variance analysis; and
financial analysis.
Management accountants must also bring skills in:-
activity-based costing,
benchmarking,
re-engineering,
target costing,
life-cycle costing,
economic value analysis,
total quality management
value chain analysis
collaborate with engineering, production, marketing, distribution and service
professionals to focus on the strengths, weaknesses, opportunities and threats
identified in the value chain analysis results.
31. Introduction to SCM Page 31
Topic 9: Case Studies
Case Study on Page no. 13.11 of ICAI Module 3
Porter’s Value Chain Model v/s Value Shop Model
WSS – developer of solar domestic water heater – Also has a wide service network – provide
good care of customers and products. WSS has a dominant position – however last 4 years
not good in terms of profit and market share.
WSS Business Model – highly qualified and skilled experts – visit customer’s locations to
identify and design – prepare design as per customer’s requirement – WSS experts are
recognized as best in the industry – and most effective solutions to their complaints.
Then – Prototypes are developed – then prototypes are tested – once designed is final –
passed to manufacturing division for production – then installs at the customer location –
then render annual maintenance services.
Although customers appreciate the high quality of the solution – but complain about the
high prices – though they are satisfied with the services – Consequently WSS lower down its
prices to compete.
Firm in an opinion to discontinue manufacturing and installation stages – partners are in
opinion to have value chain analysis.
Q1. Benefits of Value Chain Analysis in context of WSS
Answer:
Define Value Chain and focus of value chain
Link the focus of value chain with WSS i.e. For WSS, value chain can provide with more
unambiguous picture of value of the manufacturing function as perceived by the
customers
Benefits
This model helps in analyzing other firms within the same industry. As in the given case,
it was provided that other firm are cost effective for the customer. WSS can use value
chain analysis for identifying the reasons for the same.
Value Chain Analysis helps a firm to gain sustainable competitive advantage by obtaining
cost leadership and improves product differentiation. In the given case, WSS is defeated
by their competitors only on the basis of price. The current scenario is due to high cost
of manufacturing to WSS.
After a detailed analysis, WSS may decide to outsource its manufacturing operations and
keep focus on designs and services to the customer.
Value chain analysis help in preparation of performance metrics for WSS. This may
enables the partners to take decision regarding the future vision of the firm.
Q2. Disadvantages of Value Chain Analysis in context of WSS
Answer
Porter’s Value Chain analysis cannot be applied to firms belonging to service industry. In
context to WSS which has upward profits from rendering solutions and services over
manufacturing of plan, porter value chain may not provide a clear analysis.
32. Introduction to SCM Page 32
The implementation of this model is complicated and could be a course of frustration for
the management. Although WSS has highly expert staff, they may not see value in depth
analysis as required by this model.
This model is time consuming and expensive as a whole. This model requires a reliable
data and even implementation does not guarantee that the process will lead to have an
upward trend in the profits of WSS.
This analysis does not consider the value networks. In business line of WSS where
interaction with the customer is so high cooperative relationship are majorly
considerable.
Q3. Explain the other form of Value Chain Analysis that may be suitable for WSS
Answer:
WSS requires acknowledging that the nature of its business is turning from
manufacturing zone to a solution provider. From this point of view, it would be
better for WSS for analyze its business using Value Shop Model.
Explain Value shop Model (3 Points)
Since WSS communicates with the customers to find a solution before testing of
developed prototypes, they will find this model more effective and competitive for
use.
Case Study on Page no. 1.29 of ICAI Module 1
Competitive Advantage
Wireless – manufacturer of phones – has two range – Mobile A, low price and basic
features, target to price conscious customers – high competition in market for Mobile A -
Mobile Z, premium price, latest technology, target to technology savvy customers – wireless
has unique features in Mobile Z due to R&D.
Wireless – marketed to attract customer – standardized the components and engineering of
both the phones – JIT policy in production – thereby improve quality of Mobile A. However
due to heavy competition – reduces the price of mobile A – lead to shrinkage of profit
margin – thereby start cost cutting.
Future of industry focuses on AI technology – staff feel that after technological change –
their devices even go redundant.
Q1. Identify the strategy that wireless is using in Mobile A and Mobile Z
Answer:
Wireless is following low cost strategy for Mobile A and Product differentiation strategy for
Mobile Z.
Mobile A is offered at discounted rates and targets the price sensitive customers. Low Cost
leadership may allow the company to gain the market share in a highly competitive
environment. Wireless has also finds the way to keep its prices low by way of
standardization of activities and production processes which also help to maintain or even
improve the quality of Mobile A.
33. Introduction to SCM Page 33
Mobile Z is offered at a premium price to customers who perceived unique products.
Wireless has obtained this uniqueness by way of incurring R&D cost. Further differentiation
can be achieved by way of providing superior quality, superior innovation and superior
customer responsiveness.
Q2. Discuss the risks involved in each of these strategies
Answer:
The risk involved in a low cost strategy for Mobile A is that this strategy may put the margins
under pressure for the company and may compel the wireless to look into methods to cut it
costs. In lowering of costs company may impact the quality of product which may lead to
shrinkage of market share.
Further, the low cost advantage will be lost once its competitors find a way to lower their
prices. This whole strategy may also impact the unprofitable players in the industry as
ultimate margin will be put under pressure.
The risk involved in a product differentiation for Mobile Z is that it does not work for
customers who are price sensitive. Further, in case if current customer of product Z become
price sensitive, the sale will start falling and company may lose its profitability.
Another risk involved is the ability of competitors to replicate the features of Mobile Z and
even at lower prices.
Further, the external risk factors for wireless would be from the development of AI
technologies. As estimated by the company, this may lead their current product as
redundant. Therefore, wireless must be flexible enough to adopt the changes and shall
assess the technological developments which may affect them.
Q3. Advise wireless to sustain its current strategy for Mobile A
Answer:
Low Cost advantage can be maintained by
Reduce costs by copying rather than creating designs, using cheaper materials and
other cheaper resources, reducing labour costs and increasing labour productivity.
Attaining economies of scale by high-volume sales.
Use high-volume purchasing to get discounts for bulk purchase.
Gaining learning and experience curve benefits
The research and experience of Mobile Z can be leveraged by the company in Mobile A.
Further, standardization of design and production procedures will not improve the quality of
the product but also help the company to keep its prices lower.
Further, costs would be benefited from economies of scale due to large production
volumes. Bulk Purchases of components form the supplier gives wireless the advantage of
negotiating for discounts on purchases. Also, adoption of KIT policy will reduce the
inventory holding cost of company and saves the working capital.
All these measures will contribute towards lowering the cost of production of Mobile A. This
will help wireless to sustain its low cost advantage.