Chapter 4

Naga College Foundation Inc.
DEVELOPING A COMPETITIVE
STRATEGY AND CONTEMPORARY
COST MANAGEMENT TECHNIQUES
Chapter 4
DEVELOPING A COMPETITIVE STRATEGY

STRATEGY
- Set of policies, procedures and approaches to business that

produce long-term success
- Specifies how an organization matches its own capabilities
with the opportunities in the marketplace to accomplish its
objectives
CHAPTER 4 DISCUSSION Naga College Foundation Inc.
Examples of Competitive Strategies:
• Cost Leadership – compete on the basis of

providing a quality products and services at
low price.
• Product Differentiation – compete on the

ability to offer unique products often at a
price higher than the products or services of
competitors.
What Management Accountants do?
- Together with the managers they

formulate strategy by providing information
about the sources of competitive strategies
• Who are our most important customers?
• How sensitive are their purchases to price, quality and service?
• Who are our most important suppliers?
• What substitutes products may exist in the marketplace, and

how do they differ from our product in terms if price and quality?
• Is the industry demand growing or shrinking?

• Is there over capacity?
STRATEGIC MEASURES OF SUCCESS

STRATEGIC FINANCIAL AND NONFINANCIAL MEASURES OF SUCCESS –
“CRITICAL SUCCESS FACTORS (CSFS)”
Financial performance measures Non-Financial measures of operation
include among the others include among others
a. Growth in sales and earnings
a. Market Shares
b. Cash flow
b. Product quality
c. Stock price c. Customer satisfaction
d. Growth Opportunities
Figure 4-1: Financial and Nonfinancial Measures of Success

or Critical Success Factors and How to Measure CSF
Critical Success Factors How to Measure CSF
Financial Measures of Success
Level of sales in critical product groups, sales trend, percent of

Sales
sales from new products, sales forecast accuracy
Profitability Earnings from operations, earnings trend, dividend growth
Cash flow, trend in cash flow, interest coverage, asset turnover,

Liquidity
inventory turnover, receivables turnover, credit ratings
Market Value Share Price


Non-Financial Measures of Success Customer Factors
Customer satisfaction Customer returns and complaints, customer survey
Coverage and strength of dealer and distributor channel

Dealer and distributor
relationships; e.g., number of dealers per state or region
Trends in sales performance, training, market research

Marketing and selling
activities; measured in hours or peso
On-time delivery performance, time from order to customer

Timeliness of delivery
receipt
Quality Customer complaints, warranty expense


Internal Business Process
Number of defects, number of returns, customer survey, amount of scrap, amount

Quality
of rework, field service reports, warranty claims, vendor quality defects
Cycle time (from raw materials to finished product); labor efficiency; machine
Productivity
efficiency; amount of waste, rework, and scrap
Flexibility Setup time, cycle time
Equipment
Downtime, operator experience, machine capacity, maintenance activities
readines
Safety Number of accidents, effects and accidents


Learning and Innovation
Product Number of design changes number of new patents or copyrights, skills of research and
innovation development staff
Timeliness of
Number of days over or under the announced ship date
new product
Skill
Number of training hours, amount of skill performance improvement
development
Employee
Employee turnover, number of complaints, employee survey
morale

Rate of turnover, training, experience, adaptability, financial

Competence
and operating performance measures
Other Factors
Government
Number of violations, community service activities
relations
Consequences of Lack of Strategic Information
• Decision making based on intuition
• Lack of clarity about direction and goals
• Lack of clear and favorable perception of the firm by

customers and suppliers
• Incorrect investment decisions; choosing products, markets,

or manufacturing processes inconsistent with strategic goals
• Inability to effectively benchmark competitors, resulting in

lack of knowledge about more effective competitive
strategies
• Failure to identify most profitable products, customers and

markets
COMPETITIVE STRATEGIES
For a firm to sustain a competitive
position, it must purposefully or as a
result of market forces, arrive at one
of the TWO COMPETITIVE
STRATEGIES, namely Cost Leadership
and Product Differentiation.
COST LEADERSHIP Naga College Foundation Inc.
- a competitive strategy in which a firm succeeds in

producing products or services at the lowest cost in
the industry. A firm that is a COST LEADER makes
sustainable profit at lower prices thereby limiting the
growth of competition in the industry through its
success in PRICE WARS.
PRODUCT DIFFERENTIATION Naga College Foundation Inc.
- implemented by creating a perception among

consumers that the product or service is unique in
some important way, by being of higher quality,
features or innovation.
OTHER STRATEGIC ISSUES Naga College Foundation Inc.
- a firm succeeds by adopting and effectively

implementing one of the strategies. A firm is not
likely to be successful if any one of the strategy does
not achieve.
A. TOTAL QUALITY MANAGEMENT

To survive in an increasingly competitive environment, firms realize that they
must produce high-quality products. As a result, an increasing number of
companies have instituted total quality management programs to ensure that
their products are of the highest quality and that production processes are
efficient.
-Total quality management (TQM) is a technique in which management develops

policies and practices to ensure that the firm's products and services exceed
customers' expectations.
A. TOTAL QUALITY MANAGEMENT

TQM affects product costing by reducing the need to track the cost of scrap
and rework related to each job.
-Total Quality Management (TQM) is a formal effort to improve quality
throughout an organization's value chain.
Thee two major characteristics of

TQM are:
(1) a focus on serving customers
(2) systematic problem-solving using teams made up of front-line workers.
B. JUST-IN-TIME (JIT)
- is the philosophy that activities are undertaken only as needed or demanded.
- is a production system also known as pull-it-through approach, in which
materials are purchased and units are produced only as needed to meet actual
customer demand.
- is a system in which each component on a production line is produced
immediately as needed by the next step in the production line. In a JIT
production line, manufacturing activity at any particular workstation is
prompted by the need for that station's output at the following station.
Financial Benefits of JIT.
B. JUST-IN-TIME (JIT)
JIT tends to focus broadly on the control of
total manufacturing costs instead of individual
costs such as direct manufacturing labor.
JIT can provide many financial benefits, including:
1. Lower investment in inventories 6. Reduction in costs of waste and
2. Reductions in carrying and handling costs spoilage as a result improves quality
3. Reductions in risk of obsolescence of inventories. 7. Higher revenues as a result of
4. Lower investment in plant space for inventories responding faster to customers.
and production. 8. Reductions in paperwork.
5. Reductions in setup and total manufacturing costs.
MAJOR FEATURES OF JIT PRODUCTION SYSTEM

There are five main features in a JIT production 4. Emphasis is placed on reducing setup
system: time, which is the time required to get
1. Production is organized in manufacturing equipment, tools and materials ready to
cells, a grouping of all the different types of start the production of a component or
equipment used to manufacture a given product, and manufacturing lead time,
product. which is the time from when an order is
2. Workers are trained to be multiskilled so that ready to start on the production line to
they are capable of performing a variety of when it becomes a finished good.
operations and tasks. 5. Suppliers are carefully selected to
3. Total quality management is aggressively obtain delivery of quality-tested parts
pursued to eliminate defects. in a timely manner.
C . PROCESS REENGINEERING Naga College Foundation Inc.
Reengineering - is a process for creating

advantage in which a firm reorganizes it's
operating and management functions, often
with the result that jobs are modified,
combined or eliminated.
PROCESS REENGINEERING
Is a more Radical approach to improvement then
TQM, is an approach where a business process is
diagramed in detail, questioned and then completely
redesigned in order to eliminate unnecessary steps,
to reduce opportunities for errors and to reduce
costs.
A BUSINESS PROCESS is any series that an
followed in order to carry out Task in Business.
BUSINESS PROCESS Naga College Foundation Inc.
The steps used in process Reengineering are:
1. A business process is diagrammed in detail.

2. Every step in the business process must be analyzed
and justified.
3 the processes redesigned to include only those steps
that make the product or service more valuable.
This process can yield the following anticipated results:

1. Process is simplified
2. Process is completed in less time.
3. Costs are reduced and
4. Opportunities for errors are reduced.
D. BENCH MARKING Naga College Foundation Inc.
Is a process by which a forms-

•determines its critical success factors ;
•studies the best practices of other firms ( or other
units within a firm) for achieving these critical success
factors and ;
•then implement improvements in the firms processes
to match or beat the performance of these
competitors.
E. MASS CUSTOMIZATION
- is a management technique in which

marketing and production processes are
designed to handle the increased variety that
results from delivering customized products
and services to customers.
F. BALANCES SCORECARD
The balanced scorecard is an accounting report that includes
the firm’s critical success factors in four areas
(a) Financial performance
(b) Customer satisfaction
(c) Internal business process, and
(d) Innovation and learning

CHAPTER 4 DISCUSSION
The concept of balance captions the intent of broad
coverage, financial and nonfinancial of all the factors that
contribute to the success of the firm in achieving its
strategic goals. The use of the balanced scorecard is thus
a critical ingredient of the overall approach that firms take
to become and remain competitive.
G. ACTIVITY-BASED COSTING AND Naga College Foundation Inc.
MANAGEMENT
Activity Analysis
It is used to develop detailed description of

the specific activities performed in the
operation of the firm. Many firms have found
that they can improve planning, product
costing, operational control, and
management control by using activity
analysis to develop a detailed description of
the specific activities performed in the firm's
operations.
G. ACTIVITY-BASED COSTING AND Naga College Foundation Inc.
MANAGEMENT
Activity Analysis
The activity analysis provides the basis for activity-

based costing and activity-based management.
Activity-based costing (ABC) is used to improve the
accuracy of cost analysis by improving the tracing
of costs to products or to individual customers.
Activity-based management (ABM) uses activity
analysis to improve operational control and
management control. ABC and ABM are key
strategic tools for many firms, especially. those with
complex operations, or great diversity of products.
H. THEORY OF CONSTRAINTS
This emphasizes the importance of
managing the organization's constraints
or barriers that hinder or impede
progress toward an objective. Since the
constraint is whatever is holding back
the organization, improvement efforts
usually must be focused on the
constraint to be really effective.
The basic sequential steps followed in applying TOC are:
1. Analyze all the factors of production (materials, labor, facilities, methods,

etc.) required in the production clain.
2. Identify the weakest link, which is the constraint.
3. Focus improvement efforts on strengthening the weakest link.
4. If improvement efforts are successful, eventually the weakest link will
improve to the point where it is no longer the weakest link.
5. At this point, a new weakest link (new constraint) must be identified and
improvement efforts must be shifted over that link.
I. LIFE-CYCLE COSTING
Is a management technique used to
track and identify a product's costs over
the course of its life. It consists of all
steps from product design and raw
material acquisition to finished product
distribution and servicing.
The steps consist of:
1. Research and development

2. Product design, including prototyping, target costing and
testing
3. Manufacturing, inspecting, packaging and warehousing
4. Marketing, promotion and distribution
5. Sales and service
J. TARGET COSTING
TARGET COSTING COMPRISES THE ASSESSMENT OF THE

TARGET COST FOR A PRODUCT OR THE BASIS OF A GIVEN
COMPETITIVE PRICING SO THAT THE PRODUCT WILL
MAKE A DESIRED PROFIT. THE BASIC RELATIONSHIP
THAT IS OBSERVED IN THIS APPROACH IS:
TARGET COST = MARKET DETERMINED PRICE – DESIRED PROFIT

K. COMPUTER-AIDED DESIGN AND MANUFACTURING
MORE COMPANIES ARE USING COMPUTER-AIDED

DESIGN (CAD) AND COMPUTER- AIDED
MANUFACTURING (CAM) TO RESPOND TO CHANGING
CONSUMER TASTES MORE QUICKLY. THESE
INNOVATIONS ALLOW COMPANIES TO SIGNIFICANTLY
REDUCE THE TIME NECESSARY TO BRING THEIR
PRODUCTS FROM THE DESIGN PROCESS TO THE
DISTRIBUTION STAGE.
COMPUTER-AIDED DESIGN (CAD)
IS THE USE OF COMPUTERS IN PRODUCT

DEVELOPMENT, ANALYSIS, AND DESIGN
MODIFICATION TO IMPROVE THE QUALITY AND
PERFORMANCE OF THE PRODUCT.
COMPUTER-AIDED MANUFACTURING (CAM)
IS THE USE OF COMPUTERS TO

PLAN, IMPLEMENT, AND CONTROL
PRODUCTION.
L. AUTOMATION Naga College Foundation Inc.
It involves and requires a relatively large

investment in computers, computer
programming, machines, and equipment.
Many firms add automation gradually, one
process at a time. To improve efficiency and
effectiveness continuously, firms must
integrate people and equipment into the
smoothly operating teams that have become
a vital part of manufacturing strategy.
TWO INTEGRATION APPROACHES
1. FLEXIBLE MANUFACTURING SYSTEM

(FMS) IS A COMPUTERIZED NETWORK OF
AUTOMATED EQUIPMENT THAT PRODUCES
ONE OR MORE GROUPS OF PARTS OR
VARIATIONS OF A PRODUCT IN A FLEXIBLE
MANNER.
TWO INTEGRATION APPROACHES
2. COMPUTER-INTEGRATED MANUFACTURING (CIM)

IS A MANUFACTURING SYSTEM THAT TOTALLY
INTEGRATES ALL OFFICE AND FACTORY FUNCTIONS
WITHIN A COMPANY VIA A COMPUTER-BASED
INFORMATION NETWORK TO ALLOW HOUR-BY-
HOUR MANUFACTURING MANAGEMENT.
The major characteristics of modern manufacturing

companies that are adopting FMS and CIM are production
of high-quality products and services, low inventories,
high degrees of automation, quick cycle time, increased
flexibility, and advanced information technology.
M. E - COMMERCE
IS A NUMBER OF INTERNET- BASED COMPANIES HAVE

EMERGE AND BEEN PROVEN SUCCESSFUL IN LAST DECADE.
THIS E-COMMERCE MODEL ADOPTED BY AMAZON .COM AND
EBAY HAS ALSO ATTRACTED MANY INVESTORS TO PURSUE
THE USE OF INTERNET IN CONDUCTING BUSINESS.
ESTABLISHED COMPANIES WILL UNDOUBTEDLY CONTINUE
TO EXPAND INTO CYBERSPACE - BOTH FOR BUSINESS -TO-
BUSINESS TRANSACTION AND RETAILING.
N. VALUE CHAIN Naga College Foundation Inc.
Definition
It refers to the sequence of business

functions in which usefulness is added to the
products or services of a company. The term
value refers to the increase in the usefulness
of the product or service and a result its value
to the customer. The value chain is an
analysis tool that firms use to identify the
specific steps required to provide a product
or service to the customer.
Analyzing the firm’s value chain helps management discover:
• Which steps or activities are not competitive
• Where costs can be reduced, or

• Which activity should be outsourced, and
• How to increase value for the customer at one or

more of the steps of the value chain.
When properly implemented, these approaches can

(a) enhance quality, (b) reduce cost, (c) increase
output, and (d) eliminate delays in responding to
customers.
Internal Value Chain
- is the set of activities required to design,

develop, produce, market and deliver products
or services to customers. If customer values are
emphasized, managers are forced to determine
which activities in the value chain are important
to customers. A management accounting system
should track information about a wide variety of
activities than span the internal value chain.
PREPARED BY:
Alcantara, Alyssa Mae U.
Almojuela, Malesia
Babilonia, Desiree Shane
Briones, Alaiza Jean
Delos Santos, Jessabell
Latonio, Rechiel
Macabales, Carl Marie
Moral, Shaine
Salayon, Noimebel

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Naga College Foundation Inc.

DEVELOPING A COMPETITIVE STRATEGY

- Set of policies, procedures and approaches to business that

Examples of Competitive Strategies:

• Cost Leadership – compete on the basis of

• Product Differentiation – compete on the

What Management Accountants do?

- Together with the managers they

• How sensitive are their purchases to price, quality and service?

• Who are our most important suppliers?

• What substitutes products may exist in the marketplace, and

• Is the industry demand growing or shrinking?

STRATEGIC MEASURES OF SUCCESS

c. Stock price c. Customer satisfaction

Figure 4-1: Financial and Nonfinancial Measures of Success

Critical Success Factors How to Measure CSF

Financial Measures of Success

Level of sales in critical product groups, sales trend, percent of

Profitability Earnings from operations, earnings trend, dividend growth

Cash flow, trend in cash flow, interest coverage, asset turnover,

Market Value Share Price

Figure 4-1: Financial and Nonfinancial Measures of Success

Non-Financial Measures of Success Customer Factors

Customer satisfaction Customer returns and complaints, customer survey

Coverage and strength of dealer and distributor channel

Trends in sales performance, training, market research

On-time delivery performance, time from order to customer

Quality Customer complaints, warranty expense

Figure 4-1: Financial and Nonfinancial Measures of Success

Internal Business Process

Number of defects, number of returns, customer survey, amount of scrap, amount

Flexibility Setup time, cycle time

Safety Number of accidents, effects and accidents

Figure 4-1: Financial and Nonfinancial Measures of Success

Learning and Innovation

Figure 4-1: Financial and Nonfinancial Measures of Success

Rate of turnover, training, experience, adaptability, financial

Consequences of Lack of Strategic Information

• Decision making based on intuition

• Lack of clarity about direction and goals

• Lack of clear and favorable perception of the firm by

• Incorrect investment decisions; choosing products, markets,

• Inability to effectively benchmark competitors, resulting in

• Failure to identify most profitable products, customers and

- a competitive strategy in which a firm succeeds in

- implemented by creating a perception among

- a firm succeeds by adopting and effectively

A. TOTAL QUALITY MANAGEMENT

-Total quality management (TQM) is a technique in which management develops

A. TOTAL QUALITY MANAGEMENT

Thee two major characteristics of

MAJOR FEATURES OF JIT PRODUCTION SYSTEM

Reengineering - is a process for creating

The steps used in process Reengineering are:

1. A business process is diagrammed in detail.

This process can yield the following anticipated results:

Is a process by which a forms-

- is a management technique in which

(a) Financial performance