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CHAPTER

 
1 2

AN INTRODUCTION TO
STRATEGIC COST
MANAGEMENT
LEARNING OUTCOMES
After studying this chapter, you will be able to:
❑ UNDERSTAND the need of strategic cost management and ANALYSE its
distinction from traditional cost management.
❑ UNDERSTAND the source of Gaining Competitive Advantage, apart from
APPLYING Value Proposition Canvas and Osterwalder's Business Model
Canvas.
❑ ANALYSE the external environment to EVALUATE the Industry Profitability
& UNDERSTANDING Customers and Markets, Basis of Competition, and
Key Success Factors.
❑ EVALUATE the role of Information Technology in strategy making with
specific application in case of the Porter’s Five Forces and the Value Chain.
❑ EVALUATE the role of Management Accountant as a Leader and
UNDERSTANDING the Communication, Decision Making, and Business
Ethics aspect of Management Accountant role.


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1.2 STRATEGIC COST & PERFORMANCE MANAGEMENT

Chapter Overview

This chapter will start by highlighting the limitations of traditional cost management and showcasing
how Strategic Cost Management aligns costs with the business strategy while measuring and
managing costs. This chapter will provide an overview of the organizational and ex ternal
environment context of Strategic Cost Management, followed by a discussion of the role of
information technology and information systems in the strategic context, as well as shed light on the
role of the management accountant as a leader.

A. MANAGING COST STRATEGICALLY

Let’s start by acknowledging the fact that ‘anything which can be measure, can also be controlled
and managed1’. Therefore, the earlier cost control and now cost management are applied realities
for optimisation as an extension of cost accounting.


1 V. F. Ridgway published a paper in 1956 criticizing the measurement mantra. Simon Caulkin, a columnist, neatly
summarized Ridgway’s argument as:
“What gets measured gets managed — even when it’s pointless to measure and manage it, and even if it harms the
purpose of the organisation to do so”.

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Here students are advised to take note that cost accounting deals with only ascertaining and
recording of costs, not control or management thereof; it is management accounting that
empowers management of organisations with an information and support system, to make efforts
and attempts to control and manage the cost.
The emphasis was only on containment of cost under the cost control (maintaining status quo), but
with changing business environment wherein every organisation is witnessing the cut-through
competition; the emphasis has been shifted (better to say widen) from cost containment to cost
reduction. Cost reduction is emotive term hence shall be better represented though term ‘cost
management’.
Traditionally cost management focused only on cutting or reducing cost, whereas the focus is widen
now and aiming for either reducing cost while maintaining same quality level (value) or increased
value at same or reduced cost level, hence in contemporary set-up the Cost Management is much
more than just cost reduction, it gained the strategic importance in aligning the cost to business
strategies.

Strategic Cost
Cost Cost Control - Traditional Cost
Management -
Ascertainemnt - Containment of Management -
Alligning costs to
Recoding of Cost Cost Cost Reduction
strategies

Figure A.1 – Evolution of cost concepts over time horizon

When techniques of cost management practiced as strategic driver in context of organisational

objectives and vision, termed as Strategic Cost Management. In other words Strategic cost
management deals with measuring and managing costs and aligning them to the business strategy.
Prior to discuss the underneath aspects of Strategic Cost Management and to highlight the its
difference from traditional cost management; let us consider the limitations of traditional cost
management, which warrants the evolution of Strategic Cost Management.
1. Traditional Cost Management & Its Limitations
Traditional Cost Management aims at cost reduction. It revolved around the central theme ‘that cost
cutting always results in enhanced profits’. But a question arises here, whether the theme of
traditional cost management always hold truth, the simplest answer to this question is NO, not in
every case.


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Let’s consolidate the above answer, by considering following illustrations –

▪ Reducing cost by not performing preventive maintenance as and when it became due as per
maintenance schedule, may leads to major breakdown and therefore results in high corrective
maintenance cost and lower profitability.
▪ In order to reduce cost, if any automobile business decide to close some of the service stations,
then may end with losing customers due to poor after sale services, which in turn leads to
reduction in top line (i.e., Revenue) as well as lower bottom line (i.e., Profit).

Practical Insight (In continuation to above illustration)

In Automobile sector, services stations or dealers network are act a touch point to engage the
customer, hence carry strategic importance. Vehicle owners in India place a great level of
importance on proactive service advisor-led interaction during their service experience, according
to the J.D. Power 2022 India Customer Service Index (CSI) Study SM released on 24 th Nov 2022.
Mr. Pareek in 2015 when joined as President, Passenger Vehicle Business, Tata Motors, said
‘’another important thing is the dealer network. India is spread over 650 districts and 5,500 tehsils.
But our footprint is there only in 460 places. The task we have taken is to inc rease the dealer
network by three times. We will increase the network to 1,500 in the next four years and this
year’’ When in 2016 Tata Motors attained 3rd rank by securing 3nd highest score (888 out of 1,000,
improvement of 39 points) in J.D. Power India 2016 Customer Service Index; Mr. Pareek said,
“Service is key in the automotive industry and makes a difference in the car buying decision too’’.
Above illustration in pre-context of stated industry insight highlight the limitations of traditional cost
management in considering customer value proposition, aspects of market, basis of competition,
quality and many more. The major limitations of traditional cost management are listed below –
▪ Traditional cost management ignores the competition, market growth, and customer
requirement, because it is largely concerned with the quantitative factors, inside the
organisation.
▪ Traditional cost management has excessive focus on cost reduction. It ignores the strategic
importance of individual cases. Broad cost reduction leads to inferior quality.
▪ Traditional cost management ignores the dynamics of marketing and economics because
it relies upon financial accounting data which is static and historical in nature.
▪ Traditional cost management has limited focus on review and investigation, only of those
variances and deviations which are quantitative in nature.
▪ Traditional cost management is reactive approach. It can be seen as corrective function rather
preventive.
▪ Traditional cost management has short-term outlook, may focus on upcoming year, quarter
or even month.

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The above specified limitations of traditional cost management, in itself emphasis on the need of
Strategic Cost Management. The need of strategic cost management also observed due to–
▪ Requirement of detailed cost analysis is essential to gain in depth understanding of cost
structure.
▪ Strategic use of cost data to gain and sustain competitive advantage.
▪ To assimilation cost management into strategy and vice-versa.
▪ To comprehension the big picture (a canvas that can showcase the business model) to have
holistic analysis of cost relations among the different activities and empower the management
in managing those relations.
Cooper and Slagmulder2 rightly suggested ‘it is not sufficient to simply reduce costs; instead,
costs must be managed strategically’.
 Note: Students are advised to read need of strategic cost management in reference to second chapter
i.e., Modern Business Environment.
2. Strategic Cost Management (SCM)
Strategic cost management is the implementation of cost management techniques to sustain and
improve the organisation’s strategic position as well as to reduce costs. It also deals with collecting,
processing, analysing and dissemination of cost data with a view to feed information to the system
for decision-making to support the organizational strategy as a whole.
Hence, Strategic Cost Management is the use of cost information in developing and deploying the
strategy to practice the superior performances that leads to sustainable competitive advantage.
Strategic Cost Management can be applied in service and manufacturing settings and also in not-
for-profit environments. Strategic Cost Management deals with assimilation of both the, quantitative
as well as qualitative information in decision making.
Strategic Cost Management is the application of cost management techniques so that they
simultaneously improve the strategic position of a firm and reduce costs.
2.1 Underneath Pillars of Strategic Cost Management
Strategic cost management has three important pillars, viz., strategic positioning, cost driver analysis
and value chain analysis.


2 Cooper, R., & Slagmulder, R. R. A. (1998). Strategic cost management - What is strategic cost
management? Management Accounting, January, 14-16.


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Value Strategic
Chain Positioning
Analysis Analysis

Cost Driver
Analysis

Strategic Cost Management

Figure A.2 - Pillars of Strategic Cost Management

Strategic Cost Management is the managerial use of cost information explicitly directed at one or
more of the four stages (strategy formulation, communicating the strategy, implementing and
controlling) of strategic management. Overall recognition of the cost relationships among the
activities in the value chain, and the process of managing those cost relationships to the attainment
of firm's strategic objectives are the main focal point of Strategic Cost Management.
The Relation among pillars can be viewed as ‘understanding value chain will helps in defining the
optimal strategic position (Positioning Strategy), and eventually both help in identifying relevant cost
drivers’.
2.1.1 Value Chain Analysis
Michael E. Porter3 in 1985 advocated using value chain analysis to gain competitive advantage.
Value Chain is the sequential chain of activities which leads to delivery of final product to the
customer, it also depicts how value (utility) accumulates to customer.
 Note – The use cases of Value Chain as a Model, discussed in detail under heading 2 in the Chapter, An
Introduction to Strategic Performance Management.


3 Michael E Porter in year 1985 in his book Competitive Advantage: Creating and Sustaining Superior Performance
introduce generic value chain. This book answered the questions he posed, things remain undone in his earlier book
‘Competitive Strategy - Techniques for Analysing Industries and Competitors’ written in 1980.

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Figure A.3 – The Generic Value Chain 4

Value chain comprises the activities in two sets, first being primary activities (Verticals) which are
directly involved transformation of product or provisioning of service; whereas second set is support
activates (Horizontal) which ensure support to perform primary activities. Margin is the excess of
the value which a customer ready to pay over the cost incurred by firm for the product.
Primary Activities comprising of:
I. Inbound logistics that covers receiving, storing, and handling raw material inputs. Mind it,
Inbound logistic don’t cover the purchase or procurement. Inbound logistic deeply impacted by
decision of place of business operations.
Illustration – Most of Indian Sugar mills are operating in the states of UP, Maharasthra, and
Karnataka to generate value through low cost on inbound logistics because these states
collectively account for nearly 80% of sugarcane production in India, UP leading the chart with
more than 46% of total production.
II. Operations includes transformation of raw materials into finished goods and services; mind it
operations must be seen in depth, it may or may not be possible for an organisation to be
master of all the activities that are required to render the service or to convert raw material into
the finished goods, hence organisation may take decision to outsource those activities which
are not its core competences.
Illustration – Apple only designs and sells the iPhone; it doesn't manufacture its components.
Outsourcing of manufacturing to locations with lower costs of resources is the main source of
value for Apple operations.


4 Figure 2-2 at p.37 of Competitive Advantage: Creating and Sustaining Superior Performance (1985) by Michael E Porter


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III. Outbound logistics covers storing, distributing and delivering finished goods to customers.
This includes how, when and where in customers reference. Where to deliver, how to deliver
and when to deliver.
Illustration – Amazon Grocery offers delivery at shipping address which may be other than
billing address, it also offers contact-less delivery, and buyer is free to select the time band
within which delivery shall be attempted.

Practical Insight
Selection of Place of Business operation is critical to generate value form both inbound and
outbound logistics apart from core operation activities as well.
Tata Steels, a Tata Sons group company that is headquartered in Mumbai, having their early
operations in Jamshedpur and still working there. Have you ever thought why J. Tata in 1908
select Jamshedpur for Tata Steel? It was close to the iron ore, coal, and manganese deposits
as well as to Kolkata, which provided a large market…Therefore location became the source of
value for Tata Steels in both inbound and out bound logistic apart from making operation easy.
IV. Marketing and sales activities comprises conducting market research to determine the
marketing mix5 that comprises of product, price, place, promotion. McCarthy’s concept was
further developed Booms and Bitner 6 into the 7Ps of marketing mix by adding three more Ps
i.e. People, Process, and Physical evidence (Some time refers to Positioning). Newly added
3Ps have relatively more bearing on provisioning and supply of services rather goods. The
marketing and selling activates broadly comprises the aspects pertaining to these 7Ps.
It worth noting that, if we keep customer at focal point then 4Ps can be replaced by the 4Cs
that are Consumer wants and needs (for products); Cost to satisfy (for price); Convenience to
buy (for place) and Communication (for people).
Illustration – McDonald not being Indian brand, when came to Indian market modify its Marketing
Mix drastically for Indian operations to be best fit in Indian Context. Considering Product, rather
chicken patties, aloo tikki is used, prices were kept low, intensive promotional activities and
campaign lunched and most of their franchise in India offer sitting arrangements as well.

Practical Insight
Marketing and Sale efforts are truly of significant importance to let the customer, perceive value
of the product. Brands often use the tagline that are creating impact.
Maggi Noodles keep on changing its tagline from time to time –
2 mins noodles … to focus at Convenience.
Taste Bhi Health Bhi … to emphasis at Health.
2-minute mein Khushiyan (Happiness in 2 minutes) … to collaborate fun & happiness.

5By E. Jerome McCarthy in 1960 in his book Basic Marketing
6Booms, B. & Bitner, M. J. (1981). Marketing Strategies and Organizational Structures for Service Firms. Marketing of
Services, James H. Donnelly and William R. George, eds. Chicago: American Mark eting Association, 47-51

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V. After sales service includes all those activities that occur after the point of sale, such as
installation, training and repair. It is important to note that importance of after sale services is
higher in case of durable products in comparison to products falling in FMCG category. In
service industry after sale service depends upon nature of service .
Illustration – Service stations network, time taken to service the vehicle, and quality of service
(coverage of what is asked for to check or repair and manner to do so) is key aspects for
creating value for its customer for automobile industry. Even service cost become part of cost
ownership, hence shall be deciding factor for making purchases in automobile sector.
Support activities also referred as to secondary activities; it comprises of:
I. Firm Infrastructure deals with how the firm is organised? It basically describes the activities
pertaining to legal, general management, administrative, accounting, finance, public relations
and quality assurance in the organisation apart from who will perform these and how.
II. Technology development describes how the firm uses technology? Activities such as
research and development, IT management and cybersecurity that build and maintain an
organization's use of technology.
III. Human resource management describes how people contribute to competitive advantage?
Basically, it deals with the management of human capital. The Human resource functions such
as hiring, training, building and maintaining an organizational culture; and maintaining positive
employee relationships.
IV. Procurement signifies purchasing, but not just limited to materials. Finding new external
vendors, maintaining vendor relationships, and negotiating prices and other activities related
to bringing in the necessary materials and resources used to build a product or service.
Typically, increasing the performance of one of the four secondary activities can benefit at least one
of the primary activities.
Value Chain Analysis is a process of identifying Key Value Drivers (can be referred as equivalent
to CSFs) that add substantial value & contribute most towards firm’s competitive advantage by
categorising the activities into value added and non-value added activities, with objective of
eliminating non-value added activities to obtain cost leadership and focus (by further resource
deployment) on value added activities to improve product differentiation.
Hence, Value chain analysis is a means of evaluating each of the activities in a firm’s value
chain to understand where opportunities for improvement lie. Conducting a value chain analysis
prompts you to consider how each step adds or subtracts value from your final product or service.
Value chain analysis can help you realise some form of competitive advantage, such as Cost
Reduction (become Cost Leader) and Product differentiation.

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Value Chain Analysis require framework (strategic framework), which can collect variety of
information strategically, three essential analyses to collect such strategic information are–
❑ Industry Structure Analysis – to determine industry profitability and basis of competition.
❑ Core Competencies Analysis – to determine whether organisation possess the desired Key
Success Factors.
❑ Segmentation Analysis – to understand customers and markets.
 Note - How to conduct a value chain analysis, strategic framework thereof and strategies of cost
leadership and differentiation as well as how to attain them are discussed in detail under upcoming
sections of this chapter.


Figure A.4 – The Value Shop Model

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Concept Insight
Value Shop Model (or Service Value Chain) can resolve the customer’s hardship for service
providers (Figure A.4).
Value Shop Model (VSM) conceptualised by Mr. James D Thompson in 1967. It was named so
and defined by Mr. Charles B Stabell & Mr. Oystein D. Fjeldstad in 1998. Value Shop Model is
oriented to mobilises resources (man machine money and knowledge) to solve the problem by
service sector firms. This is similar to value chain, but with difference in two aspects –
▪ Rather focus on creating value, value shop model focused on solving problem.
▪ Primary activities are described as Problem Finding and Acquisition, Problem Solving,
Choice, Execution, Control and Evaluation.
Note- There is no sequence fixed for these activities or resources. Each problem is treated
uniquely and activities and resources are allocated specifically to cater to the problem. These
activities are cyclic in nature and cycle will run until solution reached .
Some of the classical examples of value shops include management consultancies such as
Boston Consulting Group, Deloitte, and McKinsey. Model can be applied to BFSI sector apart
from application in case of value based consumption services such as telecom services, services
by internet service providers, subscription of some software or data processing solution, etc.
Value is created in the shop by several mechanisms allowing the organization to solve problems
better or faster than the client. These are variables such as:
▪ The organization is in possession of more information about the problem than the client.
▪ The organization is specialized to deal with the problem at hand with specific methods to
cover analysis.
▪ Strong expertise with expert professionals is available.
To cut long story short, for professional services firm, an alternate representative of a value chain
is the value shop, which is essentially a problem resolution model. The primary activities are
problem finding and acquisition, problem solving, choosing among solutions, execution, control
and evaluation. Hence value shop principle is not concerned with value addition, instead it deals
with the resolution of customer’s hardships.
2.1.2 Strategic Position and Strategic Positioning Analysis
Understanding the strategic position is concerned with the impact of the external environment,
internal resources and competences, and the expectations and influence of stakeholders on
strategy.7 Together, a consideration of the environment, strategic capability, the expectations and
the purposes within the cultural and political framework of the organisation provides a basis for
understanding the strategic position of an organisation.


7Johnson, G., Scholes, K., Whittington, G. (2008), Exploring Corporate Strategy, 8th Edition: Financial Times Prentice
Hall (p. 13)


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Strategic Positioning Analysis is the analysis of the company's relative position within that
strategic segment of industry that matters for the purpose of establishing performance targets
(while attaining competitive advantage) in addition to determining the means (strategies and plans)
of attaining the same and then measurement of performance as well as evaluation thereof. Basically,
the intent is seen, where the firm is positioned in context to its true peer group (can be referred as
to competitor) or how it is performing in comparison to others who operating in the same segment .
To illustrate; Tata Motors’ performance or standing shall be analysed in context of Maruti, Toyota,
Honda, Hyundai rather than Audi, BMW, Mercedes.
Strategic positioning reflects choices a company makes about the kind of value it will create and
how that value will be created differently than rivals. Strategic positioning should translate into either
one of two things: a premium price (i.e., Differentiation) or a lower cost (i.e., Cost Leadership)
Note- Driving up prices is one way to increase profitability. To command a premium price, a company
must deliver distinctive value to customers…. differentiation. Driving down costs is another way to
increase profitability. To compete on cost, companies must balance price with acceptable quality….
cost leadership.

Strategic
positioning
analysis includes
the study of

III. Task IV. Environment in

Environemnt in context of
I. Culture, beliefs II. Stakeholders’
context of competitors,
and assumptions influence and
capability i.e. markets,
of the organisation expectations
resources, core regulations, etc.
competences

Mission and Strengths and Opportunities and

Vision and Values Weaknesses Threats
Objectives

Figure A.5 – Scope of Strategic Positioning analysis

I. Culture, beliefs and assumptions of the organisation helps in appraising the vision and values.
Vision is aspiration statement, while values are guiding principle that will be observed to attain such
aspiration (vision). Culture is the beliefs, values, mind-sets, and practices of a specific group of
people. It includes the behaviour pattern and norms.

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Illustration - Google's vision statement is “to provide access to the world's information in one click” .
The company's nature of business is a direct manifestation of this vision statement. For instance,
Google's most popular product is its search engine service. Further, as part of their value system,
Google is committed to significantly improving the lives of as many people as possible.

Concept Insight
Denison Organizational Culture Survey (DOCS) 8- Culture has strong bearing on Shareholders
ROI, Customer Satisfaction as well as Business Growth
Denison Organizational Culture Survey (DOCS; a 50 question employee survey) used Denison
Organizational Culture Model, to measures the specific aspects of an organization's culture
based four core critical cultural trait areas: Adaptability, Mission, Involvement and Consistency.
The survey breaks these four areas down into further 3 sub-categories each, giving a total of 12
areas of cultural assessment. Denison has found an important link between four critical culture
traits and how they can have a significant impact on organizational performance.
Culture and Shareholders’ Return on Equity
Study of 161 publicly traded companies from a broad range of industries conducted to show the
contrasts the performance of the 10% of the organizations with the best culture scores with the
10% of the organization with the worst culture scores.
Average ROE for the organizations with the lowest culture scores is 6%, Aver age ROE for
organizations with high culture scores is 21%. Highly similar results for return on total investment
Culture and Customer Satisfaction
Correlations with customer satisfaction were significant for all twelve indices . Average 24
percentile point difference between the top and bottom five performers of a large Fortune 500
construction company in all 12 indices.
Culture and Business Growth
Study of retail supermarkets in USA was conducted, comprising 12000 individual and 2500 stores
to compare culture profiles with growth rates. 1305 stores with week culture records over 5% of
sales decline, whereas 424 stores with strong culture records above 5% of sale increase.
II. Stakeholders’ influences and expectations shall be considered in order to determine what do
the shareholders want and how much they will co-operate? So that same can be reflected in mission
statement and objectives of organisation. It also needs to be seen that whether we able to meet their
expectation or not while appraising strategic position.
Different stakeholder groups have their own set of forces and tactics that have strong bearing on
organisations mission and objectives and in turn on organisations’ strategic position.
Illustration – Google’s key stakeholders are its users, and they will continue using google more and
more, if it is convenient in use, freely accessible and user friendly. This is reflected in Google’s
mission statement. Google's mission is to organize the world's information and make it universally
accessible and useful. That's why search makes it easy to discover a broad range of information
from a wide variety of sources.

8 [Link]


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Do You Know?
Do we need to consider all the stakeholders or only those who are significant enou gh? If only
those limited chunk of stakeholders, then how to identify them?
Mendelow’s Matrix helps in considering the attitude of stakeholders, while setting out strategic
objectives. Mendelow’s Matrix consists of four boxes representing stakeholders with:
High Interest and High Power – These will be considered key stakeholders and a business will
need to actively engage this group. This group are likely to have the significant influence; they
may be the driver behind the change or strategy. They will likely have the power to stop the
change or strategy going ahead if they are unhappy.
This is the group that require most focus by keeping them both updated of any strategic change
and empowered to steer the direction of change (or at least feel that they have the opportunity
to input into the direction of the project).
High Interest and Low Power – This group have an interest in what is happening; however, they
are unlikely to have the power to influence change. This group should be kept informed. Whilst
they have little power themselves, they could attempt to join forces with a group with powe r.
Low Interest and High Power – This group of stakeholders have the potential to move into the
‘High Interest and High Power’ group, so it is essential that they are kept satisfied. By keeping
them satisfied they are less likely to gain interest and exercise their power to influence.
Low Interest and Low Power – This group is unlikely to have an interest in the organization and
the strategic direction. This is often due to their lack of power to influence a situation. They are
likely to accept the poition and show little, if any, resistance

Figure A.6 – Mendelow’s Matrix and Response to each class of stakeholders

III. Strategic capabilities in terms of resources, core competences shall be analysed in context
of task environment (may be referred to as microenvironment) in which organisation is operating
to assess the strengths and weaknesses to appraise strategic position.

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Strengths shall be used aggressively to exploit the opportunities to capture competitive advantage ,
whereas weaknesses need to be analysed at the root-cause level and those causes either shall be
removed or reduced (if can’t be reduced)

Practical Insight
Tata Motors’ Strengths and Weaknesses
Tata Motors’ Strengths includes–
▪ Recognized Brand Image.
▪ Market value (USD 1.5 trillion market cap as on 16 th December 2022; 370th among the
fortune 500 worldwide of 2022).
▪ Established Distribution System (over 1,600 workshops that cover 90% of the country’s
district).
▪ Market Penetration (relatively economical product with high safety and wide network) .
▪ Research and Development (spends nearly 25% of its complete budget on research and
development).
▪ International Presence (in more than 120 countries).
Tata Motors’ Weaknesses includes–
▪ Greater operational costs and a lower rate of profits.
▪ Controversies (be it land acquisition for Tata Nano in Singur, West Bengal or acquisition of
Jaguar and Land Rover in all-cash transaction of $2.3 billion from Ford in June 2008. At that
time JLR's retro designs was getting outdated, and competing with new efficient diesel
engines was just making the British carmaker redundant).
▪ No Foothold in Luxury Segment.
▪ Limited Presence in globe (despite operating in over 120 countries Tata Motors failed to
make a strong impact like Ford, Toyota, Honda and Volkswagen).
Note – Above points are written in considering the business environment prevailing in final
calendar month of 2022, hence students while studying same at some later date may witness due
to developments during such period relevance of some of the specified points may get reduced;
therefore, must remain conscious.
IV. The macro environment (beyond the control of organisation), especially the basis of
competition, industry profitability, industry key success factors, customers’ behaviour, markets and
regulations, etc. shall be analysed to assess the Opportunities and Threats to appraise strategic
position.


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Opportunities need to be exploited whereas a defence mechanism shall be created against the
threats that can be mitigated. Risk Management is of key importance to protect the organisation
from threats to sustain the strategic position and make best out of opportunities will improve strategic
position apart from ensuring realising gain out of competitive advantages.

Practical Insight
Tata Motors’ Opportunities and Threats
Tata Motors’ Opportunities includes –
▪ Digital Marketing.
▪ Supply Chain Integrations and After-Sale Services.
▪ May sell or try product like Tata Nano in those foreign country where demand for low cost and
small car exist.
▪ Acquisition, Merger, Joint Venturing.
Tata Motors’ Threats includes –
▪ Competitors such as Honda and Hyundai aggressively striking hard to capture market share.
▪ Stagnation in economy post COVID – Slowdown in demand may be there in wake of expected
global recession.
▪ Price war and Innovation war among the players.
Note – Above points are written in considering the business environment prevailing in final
calendar month of 2022, hence students while studying same at some later date may witness due
to developments during such period relevance of some of the specified points may get reduced;
therefore, must remain conscious.

Do You Know?
What tools are handy for conducting strategic position analysis?
SWOT analysis is focal tool for Strategic Position Analysis supported by PESTEL Analysis
(specifically relied for analysis of remote environment factors), Porter’s Five Forces (for industry
analysis), Porter’s Diamond Studies, etc. for external environment analysis.
Porter's Value Chain, Critical Success Factors and Core Competencies, Product Lifecycle, The
McKinsey 7S, etc. for internal environment analysis.
Note - Lists of tools/ models stated above are illustrative only, not exhaustive.

2.1.3 Cost Driver Analysis

Cost driver is unit of that activity which cause cost to be incurred. Hence cost driver is trigger of
change in cost; meaning thereby more frequency/runs of cost driver led to more cost.

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Cost Driver Analysis includes the examination, quantification, and explanation of the monetary
effects of cost drivers associated with an activity.
It is an in-depth review of the cost drivers to make sure that your firm correctly allocates the
supporting production and service costs to all goods and services. There are different cost driver
analysis methods, including a cost accounting system review, industry analysis, and internal activity
analysis.
In traditional costing, the cost driver used to allocate overhead costs (supporting cost) to cost objects
is only relates to quantity/volume of output. But under Strategic Cost Management cost driver for
short-term overhead costs (or those which are once in while) may be the volume of output or activity.
But for long-term overhead costs variety of cost drivers are used.
Based upon nature of supporting cost (overhead cost), appropriate drivers can be identified and
be categories into following classes–
Supporting Cost

Resource Drivers Activities Drivers

Organisational Activities & Drivers Operational Activities & Drivers

Structural Activities & Drivers

Executional Activities & Drivers

Figure A.7 – Classification of cost drivers

Structural cost drivers relate to business strategic choices about an organization’s underlying
economic structure, such as scale and scope of operations, use of technology and complexity of
products. (Not necessary that more is better)
Executional cost drivers relate to the execution of the business activities, such as utilization of
employees in term of involvement, provision of quality service, product design and manufacturing,
Linkages with suppliers and clients. (Higher is the better)
 Note - Students are advised to refer annexure 1 at end chapter for detailed overview of types of cost
drivers.
2.2 Key tools of Strategic Cost Management and their nature
Following are the key tools of strategic cost management, their nature in brief described here to
highlight how they help in aligning costs to business strategies –

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Tool Description
Activity Based Costing To provide accuracy in allocating indirect costs.
Benchmarking Process performed to determine critical success factor and study
ideal procedures of other organization in order to improve operations
and dominate market.
Competitive Advantage Defining strategy that an organization could adopt to excel over
Analysis rivals.
Just-in-Time A comprehensive system to buy materials (JIT Purchase) or produce
(JIT Production) commodities when needed in appropriate time.
Kaizen - Continuous Conducting continuous improvements in quality and other critical
Improvement success factors.
Target Costing Cost that an organization is willing to incur according to competitive
price that could be used to achieve desired profit.
Theory of Constraints A tool to improve rate of transferring material into finished goods.
Total Quality Adopt necessary policies and procedures to meet customers’
Management expectations.
Value Chain Analysis Add value to customers reducing costs and understanding relation
between business organization and customers.
 Note - List of tools specified above is only illustrative, not exhaustive.
3. Traditional vs. Strategic Cost Management
Based upon discussion conducted in previous headings Traditional Cost Management & its
Limitations and Strategic Cost Management above, the following key differences between Traditional
and Strategic Cost Management can be considered–

Basis of Difference Traditional Cost Management Strategic Cost Management

Allocation of cost Volume (per unit produced). Allocation will be w.r.t relevant cost
driver – Activity Based Costing.
Nature Reactive (risk averse) approach. Proactive and dynamic approach.
Objective Cost control and reduction. Product differentiation (apart from cost
containment).
Risk Appetite Risk-averse approach. Risk taking approach and ability to
adapt itself with changing
environment.
Scope Internal business environment. Both internal and external.
Term Short term focus. Long span or perpetual focus.

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B. ORGANISATIONAL CONTEXT
Strategic Cost Management is the analysis of cost in a broader context (Organisational as well as
External Environment Context), where the strategic elements become more conscious, explicit,
and formal. The cost data is used to develop superior strategies in route to gaining sustainable
competitive advantage. Strategic Cost Management gives a clear understanding of the firm's cost
structure in search for sustainable competitive advantage through cost reduction or
differentiation.
1. Gaining Competitive Advantage
Competitive advantage is the ability of an organisation to outperform its competitors and make more
profits than its competitors do from an equivalent set of activities, through superior performance.
Gaining and maintaining competitive advantage over a period of time is challenging for organisations
in the global economy with the speed of competition and information exchange possible today.
The role of the strategist (including management accountant as cost engineer) is to engineer
superior performance within a given industry in which organisation is operating.
A genuine question arise here –
1.1 How can a strategist increase profitability?
The answer lies in having a competitive advantage. Companies must search out “white space” in
the industry, which usually means competing on either one of two fronts–

Differentiation
Cost Leadership

Figure B.1 – Generic strategic to attain competitive advantage (to enhance profitability)

Do You Know?
It’s possible to compete on low cost and be differentiated at the same time —but companies that
try to be all things to all customers can wind up getting stuck in the middle, a strategic mistake
that Michael Porter calls “the kiss of death”.


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1.1.1 Differentiation
Driving up prices is one way to increase profitability. To command a premium price, a company must
deliver distinctive value to customers. A customer may perceive high value of any product and
ready to pay premium due to differentiation it offers. E.g., Apple. Product differentiation, by
investing more time and resources into activities like research and development, design, or
marketing that can help the organisation’s product to stand out.
▪ Source - Differentiation can be sourced from Quality (Design, Knowhow or Performance),
Innovation, Customer relations/response (including after sale services), and Wide-product
range etc.
▪ Benefits - Differentiation helps either in earning the huge margin by charging top price or build
market share by charging lesser than premium price.
1.1.2 Cost Leadership
Driving down costs is another way to increase profitability. To compete on cost, firms must balance
price with acceptable quality and become lowest cost producer in an industry. E.g., Chinese Steel
Manufacturers. A firm can create a cost advantage by two different ways, by reducing the cost of
individual value chain activities and reconfiguring the value chain as shown below in the figure B.2
▪ Source - Cost Leadership can be sourced from cost effective inputs, process innovation or re-
engineering, low cost distribution channel, superior operation management, learning curve, and
economics of Scale.
▪ Benefits - By producing at the lowest possible cost the manufacturer can compete on price
with every other producer in the industry and earn the highest unit profits, or by charging lower
price than other can capture market share.

Reconfiguring
the value
chain

Reducing
the cost of
individual
value chain
activities

Cost
Leadership

Figure B.2 – Drivers of Cost Leadership

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1.2 Relation between strategies and cost management Emphasis

Strategic emphasis 9 on different aspects under Product Differentiation and Cost Leadership are
enumerated below –

Strategic Emphasis
Aspects Product
Cost Leadership
Differentiation
Role of standard costs in assessing Not very important Very important
performance
Importance of concepts such as flexible Moderate to Low High to very high
budgeting for manufacturing cost control
Perceived importance of meeting budgets Moderate to Low High to very high

Importance of marketing cost analysis Critical to success Relatively less

important
Importance of product cost as an input to Low High
pricing decision
Importance of competitor cost analysis Low High

The competitive advantage can be sourced from product differentiation or cost leadership, either by
reconfiguring value chain or by reducing cost of each individual value chain activity, hence
conducting a value chain analysis is essential in both the scenarios. So, another question arises
here,
1.3 How to conduct a Value Chain Analysis?
There are three steps involved in conducting value chain analysis –

Identify Value Chain Activities

Determine the Cost and Value of Activities

Identify Opportunities for Competitive Advantage

Figure B.3 - Steps involved in value chain analysis


9Shank (1989) Strategic Cost Management: New Wine or Just New Bottle? Journal of Management Accounting Re search
(1): 47-65


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1.3.1 Identify Value Chain Activities

The first step in conducting a value chain analysis is to understand all of the primary and secondary
activities that go into your product or service’s creation. If your company sells multiple products or
services, it’s important to perform this process for each one.
1.3.2 Determine the Cost and Value of Activities
Once the primary and secondary activities have been identified, the next step is to determine the
value that each activity adds to the process, along with the costs involved.
When thinking about the value created by activities, organisation need to ask following question from
itself –
▪ How does each activity increase the end user’s satisfaction?
▪ How does it create value for firm?
To be more specific, organisation need to answer –
▪ Does constructing the product out of certain materials make it more durable or luxurious for
the user?
▪ Does including a certain feature make it more likely your firm will benefit from network effects
and increased business?
Similarly, it’s important to understand the costs associated with each step in the process. Depending
on situation, lowering expenses may be an easy way to improve the value each transaction provides.
1.3.3 Assessing and Identify Opportunities for Competitive Advantage
Value Chain analysis can help in identify points where differentiation can be created or cost
leadership can be gained, meaning thereby value chain approach can be used to assess the
competitive advantage (because it is better to focus on process and activities involved in creation
of product rather than product only).
Hence, once you’ve compiled your value chain and understand the cost and value associated with
each step, you can analyse it through the lens of whatever competitive advantage you’re trying to
achieve.

Assessing Competitive Advantage

Internal Differentiation Vertical Linkage

Internal Cost Analysis
Analysis Analysis

Figure B.4 – Analysis for Assessing Competitive Advantage

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Internal Cost Analysis helps in understanding cost of processes/activities and identify the sources
of profitability. Steps are as follows –
▪ Identify the firm’s value creating processes.
▪ Determine the portion of the total cost of the product attribute to each value creating pr ocess.
▪ Identify cost driver for each process.
▪ Identify the link between processes.
▪ Evaluate the opportunities for achieving relative cost advantage.
To illustrate
If primary goal is to reduce your firm’s costs, you should evaluate each piece of your value chain
through the lens of reducing expenses.
▪ Which steps could be more efficient?
▪ Are there any that don’t create significant value and could be outsourced or eliminated to
substantially reduce costs?
Internal Differentiation Analysis helps in creating and offering superior differentiation to the
customers. In order to increase in value perceived by customer, following steps are to be performed;
▪ Identify the customer’s value creating process.
▪ Evaluate differentiation strategies for enhancing customer value.
▪ Determine the best sustainable differentiation strategies.
To illustrate
If primary goal is to achieve product differentiation, you should evaluate each piece of your value
chain through the lens of–
▪ Which parts of your value chain offer the best opportunity to realize that goal?
▪ Would the value created justify the investment of additional resources?
Vertical Linkage Analysis – Creating extendable organisation by extending the value chain across
the firms of supplier and users.
Using value chain analysis, you can uncover several opportunities for your firm, which can prove
difficult to prioritize. It’s typically best to begin with improvements that take the least effort but offer
the greatest return on investment.

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We already discussed in previous section of chapter that Value Chain Analysis (three steps
explained above) require strategic framework, which can collect variety of information strategically
that will used while performing above three steps (especially the third one), three essential analyses
to collect such strategic information are–
❑ Industry Structure Analysis – to determine industry profitability and basis of competition.
❑ Core Competencies Analysis – to determine whether organisation possess the desired Key
Success Factors.
❑ Segmentation Analysis – to understand customers and markets.
 Note - These three analyses are discussed in detail in upcoming section of this chapter.

 Note - Value Chain as a Model, along with how an organisation use value chain to gain and sustain
competitive advantage (desired performance) discussed in detail under heading 2 in the Chapter, An
Introduction to strategic Performance Management.
For creating sustainable competitive advantage, in depth analysis of Value Propositions is
essential; for which Osterwalder's Business Model Canvas can be helpful. But prior to move to
Osterwalder's Business Model Canvas, it is important to consider what business model is or what
does it comprise of?
2. Business Model
A business model explains how a business works and the economic logic behind it. It is a way of
representing and communicating how an organisation creates values for itself while delivering
products or services for customers.
Margretta, proposed that a business model should include all the activities associated with two key
components –
a. Producing or making something.
b. Selling something.
But in 2008, Johnson along with Christensen & Kaggerman 10 extended the scope and proposed that
a business model also needs a value proposition, therefore business model should contain three
component –
a. Customer value proposition.
b. Profit formula.
c. Key resources and processes.
Around 5 years later, in May 2013 Alexander Osterwalder further extent the scope and coverage of
business model by suggesting Business Model Canvas, discussed in detail ahead.


10Johnson M, Christensen C & Kaggerman H, 2008, ‘Reinventing your business model’, Harvard Business Review,
December, [Link]/insight/reinventing-your-business-model-form.

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3. Osterwalder’s Business Model Canvas

Alexander Osterwalder11 proposed a nine element business model canvas wherein four elements
pertaining to cost (key partners, key activities, key resources and cost structure; on left side of
canvas) are connected to another four elements pertaining to revenue (customer relationships,
channels, customer segments and revenue streams; on right side of canvas) through ninth element
that is value proposition as shown in figure B.5.
Key Partners Key Activities Value Customer Customer
Proposition Relationship Segments

Key Resources Channels

Cost Structure Revenue Streams

Figure B.5 – Generic Template of Business Model Canvas

Business Model Canvas helps the business to map, discuss, design, and develop the robust
business models. Business Model Canvas helps visualize what is important and forces users to
address key areas, hence relevant from point of strategy as well as performance.
a. Customer Segments describe who the customers of business are and why they buy from
business. Segmentation discussed in detail in the next section of this chapter.
b. Value Proposition deals with products or services that business offers to target customer
segment in order to solve their problems or satisfy their needs.


11 Osterwalder, A, (May 2013), ‘A better way to think about your business model’, Harvard Business Review, May,
[Link]


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To illustrate– Canon selling camera to capture beautiful moments and also offering range of
printers, scanner, and photocopier to make digitation, dematerialisation and duplication (replica)
easy and also facilitate taking extracts in physical form. Hence, Canon’s value propositions are
creating/capturing memories and keeping records.
Business’s value propositions shall be oriented to customers’ need and problem, not the capabilities
of business. In class 11th your school and teacher taught you bookkeeping despite they are capable
to teach analysis of financial statements or even accounting for virtual digital assets or any other
advanced topic on said day.
Tesla can manufacture cars that have auto-pilot mode; are there enough customers who really want
such a car.
Ferrari 812, Ferrari F8 Tributo, Porsche 911 Turbo S, and Lamborghini Huracan EVO have top
speed ranging from 340-325 kmph; does drivers/passenger actually require so, especially in India.
c. Channels deals with distribution channels using which business will deliver the product or
render the services to its customers. Earlier there were only physical channels, but now virtual
or digital channel such as web, cellular (mobile), and cloud; etc. came into existence.
To illustrate– Digital products such anti-virus, subscription of some website delivered digitally
rather through physical mode.
d. Customer Relationship deals with interactions. It basically answers to how do we get the
customers, keep them and grow them. Customer Relationship Management here came into the
play.
To illustrate– some businesses send promotional content (push mode of communication with
customers), while some other not (pull mode of communication with customer). Mobile App based
business model using notification as mean to keep engaging their customer; because engaging
customers is important in order to retain them.
e. Revenue Streams describes how actually business make money. It depends upon what value
the customer paying for. Here, the strategy to capture the value become significant, it may be
direct sale, transaction based price (use and pay i.e., post-paid telephone bill, electricity),
freemium, license, or subscription model.
To illustrate– YouTube earns through advertisement and premium services (Google under the
aegis of Alphabet Inc.) as it follows freemium as revenue model. Revenue Models discussed
in detail in upcoming chapters of this course. E-newspapers are using on subscription model.
f. Key Resources describes the most important assets in the business, which is nearly
indispensable, it can be man, material, machine, method, money etc. What make HCL more
profitable in term of per head profit then TCS nothing but IPRs (intellectual property rights); so
anything can be key resource for a business model. The need is to dig down and identify what
is actually driving the business.
Key resources are critical in planning, budgeting and determine the activity level. In same case
these may be Key factor (or limiting factor).

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g. Key partners include suppliers, channel partners who make the business model work. Here, it
is important consider what are resources we acquire from them are those resources are key
resources; what activities they are performing for us as business, again are these activities key
activities or not. This element also defines the need for strategic alliances and partnerships
that company need to enter into.
h. Key activities describe most important things to do in a business or to keep it running or
working. Here, the need is to define whether the business is a manufacturing solution (in
production), supply chain partner (trader or only a logistic partner) or in the problem solving
(service entity).
Key activates become basis for determination of cost drivers for absorbing the cost of supporting
activities.
i. Cost includes the expenses to operate the business and performing activities, hosting
partners, and owning the resources, here the active role of management accountant come
into play in determining cost structure and evaluating the scope as well as scale of
economics. What are the most important costs that require management, what are the most
expensive resource that require control are important aspects of this element?
3.1 How to draw Business Model Canvas
By answering the questions written next to each of element in figure B.6, a business can draw its
business model on single piece of paper; irrespective it is mere start-up or a grand old company.
8. Key Partners 6. Key Activities
4. Customer
Who are our What uniquely Relationship
partners and strategic things
How do you interact
key suppliers? does the business 2. Value 1. Customer
with the customer
Which key do to deliver its Proposition Segment
through their journey?
resources are proposition? What’s compelling Who are the
we acquiring about the customers?
7. Key 3. Channels
from our proposition? Why What do they
Resources How are these
partners? do customers buy, think? See?
What unique use? propositions Feel? Do?
Which key
strategic assets promoted, sold and
activities do
must the business delivered? Why? Is it
partner
have to compete? working?
perform?
9. Cost Structure 5. Revenue Streams
What are the business major cost drivers? How How does the business earn revenue from the
are they linked to revenue? value propositions?
Figure B.6 – Questions to answer while drawing Business Model

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Do You Know?
How to use Business Model Canvas?
▪ Element 1, 2, 3, and 4 in figure B.6 attributed to customers focus (can be correlated with value
proposition canvas i.e., heading 4 upcoming topic).
▪ Element 6, 7, and 8 in figure B.6 attributed to infrastructure.
▪ Element 5 and 9 in figure B.6 signify the financial viability.
3.2 Industry Insight
Figure B.7 and B.8 shows the business model of Skype and Gillette (Razor and Blades); respectively.

Customer
Key Partners Key Activities
Relationship
Payment Software and app Value Proposition Customer
Mass customer base
Partners development Free video calling Segment
hence casual
Telco Partners Cheaper than Web Users
Key Resources
Distribution phone (cellular) Channels Globally
Software and
Partners [Link]
developers
Cost Structure
Revenue Streams
Software development
Skype out – prepaid or subscription
Resolving complaints & debug the technical snags
Figure B.7 - Business Model of Skype

Key Activities Value Proposition Customer

Marketing and Razor Handle and Relationship
Selling apart from Stainless blades
Key Partners Lock in (Retain) Customer
R&D
Manufacturer Adjustable, Twin Segment
Key Resources Blade Shaving Channels
Retailer Mass User base
Brand Value Razors With Retails store (through
Patents and Lubricating Aloe stockist and
Trademark Vera Strip wholesaler)

Cost Structure
Research and Development cost Revenue Streams
Manufacturing cost Blade replacement for Razor
Marketing & Selling Cost Multiple Piece Value Saver Pack
Logistics cost
Figure B.8 - Business Model of Gillette (Razor and Blades)

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4. Value Proposition Canvas

Value Proposition describes the benefits that customers can expect from product and the bundle of
products and services that business offer to specific customer segment to create value.
The value proposition canvas 12 is the tool that will help the organisation to design, test, build and
manage the great customer value propositions. It’s like a plugin to the business model canvas.

Figure B.9 – Value Proposition Canvas

The tool is based upon two elements of business model i.e., the customer segment for whom
business firm intended to create the value and value proposition (value proposition map) which will
attract the customers for business. With value proposition canvas business firm can map out both
these (customer segment and value proposition) in more granularity and show the fit between what
it offers and what customer want.
4.1 Customer Segment Profile
The customer segment profile describes the characteristics of business’s customer in more detail.
The profile is composed of three elements; first being the jobs (termed as ‘Customer Jobs’) that
customers are trying to get done in their service or product, secondly the related pains i.e., aspects
outlining the negative aspects, which customer hate or like to avoid; and thirdly the gains i.e.,
aspects describing the positive outcomes or benefits which your customers desire to have.
4.1.1 Customer Jobs describes the important issues that business’s customers are trying to
solve/resolve in their work, it could be their needs that they wish to satisfy or may be a task that they
try to perform and complete in their life (professional and personal) or at workspace .
To illustrate, Matrimonial services, Legal advice, specially designed shoe for internationally
recognised player, Construction of house (safety, look, comfort can any be their major concern),
ordering food with specifications, face mask/PPE Kit to protect from specific virus etc.


12By Alexander Osterwalder, Yves Pigneur, Gregory Bernarda, Alan Smith in Value Proposition Design - How to Create
Products and Services Customers Want (2014)


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Mind it, customers include industrial customers and jobs can have functional, social or
emotional/personal intent. Some jobs may be crucial to customers, some other may be trivial. To
illustrate, Tata Motors seeking specially designed assembly from its vendor for electronic vehicle;
Message over birthday cake ordered is crucial, seasoning and toppings of pizza you just ordered is
crucial aspects.
4.1.2 Pains describes anything that annoy the customers before, during or after getting a job done.
This could be undesired cost, situation, negative emotions or even risks. Obviously , some of the
customer pains will be severe while certain others are mild.
4.1.3 Gains describes the outcome or benefits that the customers require, expects or desires; as
well as a benefit which is complementary which he don’t expect, but will be excited or surprised if
get it. This includes things like functional utilities, social gains, positive emotions and cost saving.
Obviously, some of the benefits will be more relevant to customers than others.
These three elements of the profile describe the customer characteristics that you can observe in
the market.


Concept Insight
Clear and concrete description of pains and gains is essential key to offer better value proposition .
To clearly differentiate jobs, pains, and gains, describe them as concretely as possible. For
example, when a customer says, “waiting in line was a waste of time,” ask after how many minutes
exactly it began to feel like wasted time. That way you can note “wasting more than x minutes
standing in Line.” When you understand how exactly customers measure pain severity, you can
design better pain relievers in your value proposition.
Ranking jobs, pains, and gains is essential.
Although individual customer preferences vary, you need to get a sense of customer priorities.
Investigate which jobs the majority consider important or insignificant. Find out which pains they
find extreme versus merely moderate. Learn which gains they find essential, and which are simply
nice to have.
Ranking jobs, pains, and gains is essential in order to design value propositions that address
things customers really care about Of course, it’s difficult to unearth what really matters to
customers, but your understanding will improve with every customer interaction and experiment.
It doesn’t matter if you start out with a ranking that is based on what you think is important to your
potential customers as long as you strive to test that ranking until it truly reflects priorities from the
customer’s perspective.
4.2 Value Proposition Map
Value proposition map describes the features of business’s value proposition which business has
designed to address its customers’ jobs (though product and services), pains (though pain relievers);
and gains (through gain creators). Hence value proposition map is composed of the three elements,
firstly the product and services around which you value proposition is built; secondly the pain
relievers that outlines the how business’s product and services alleviate the customers’ pains;

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thirdly the gain creators describing the positive outcomes and benefits, that business’s products
and services create for your customers.
4.2.1 Products and services outlines the bundle of products and services that business is offering
to its customer to help them get a functional, social, or emotional/ personal job done and to address
their pains and gains in process of so.
4.2.2 Pain Relievers explicates how your products and services will alleviate specific customer
pains before, while, and after the customer trying to get the job done. Pain relievers show or highlight
which of all the customers’ pain addressed by the value proposition by either eliminating or reduci ng
them.
4.2.3 Gain Creators describes how products and services offered by business create customer
gains. Gain creators shows which of all the customers’ gain addressed by the value proposition by
creating benefits and outcomes.


Do You Know?
Can you list the elements that can contribute to customer value creation (act as either pain
reliever or gain creator)?
▪ Newness - Some Value Propositions satisfy an entirely new set of needs that customers
previously didn’t perceive because there was no similar offering. Cell phones for instance,
created a whole new industry around mobile telecommunication.
▪ Performance - Improving product or service performance has traditionally been a common
way to create value.
▪ Customization - Tailoring products and services to the specific needs of individual customers
or Customer Segments creates value.
▪ Design - A product may stand out because of superior design. Design is major element in
determining the cost. Design not of product of only but also of process and service through
which that product is manufactured and sold.
▪ Brand/status - Customers may find value in the simple act of using and displaying a specific
brand.
▪ Price - Offering similar value at a lower price is a common way to satisfy the needs of price -
sensitive Customer Segments.
▪ Cost reduction - Helping customers reduce costs is an important way to create value.
▪ Risk reduction - Customers value reducing the risks they incur when purchasing products or
services.
▪ Accessibility - Making products and services available to customers who previously lacked
access to them is another way to create value.
▪ Convenience/ usability - Making things more convenient or easier to use can create
substantial value.
Mind it, above list is non-exhaustive in nature.

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Business is said to achieve a problem-solution fit, when the features of business’s value
proposition map perfectly match the characteristics of your customer segment profile. When the
market validates this match and business value proposition gets traction with real customers,
business achieved the product-market fit.
It is worth noting that, successful and sustainable business have more than just a great value
propositions, they have a great business model that makes a customer value proposition possibl e.


Do You Know?
What are the key questions that business supposed to asked while performing defining value
proposition or working on its value proposition canvas?
▪ What value do we deliver to the customer?
▪ Which one of our customer's problems are we helping to solve?
▪ Which job are we helping the customer get done?
▪ Which customer needs are we satisfying?
▪ What bundles of products and services are we offering to each Customer Segment?
To conclude, the Value Proposition Canvas has two sides. With the Customer Profile business can
have clear understanding of customer character. With the Value Map business describe how it intend
to create value for that customer. Business achieve Fit between the two when one meets the other.

C. EXTERNAL ENVIRONMENT CONTEXT

Survival and sustainability are precondition for any business to be successful. Survival of fittest
(fittest to the business environment in which business operates) is universal principle, hence need
of crafting and deploying the agile strategies (capable to respond and adapt the changes that are
taking place in and around it) become inevitable; therefore, it become essential to understand
business environment. Earlier also in this chapter, we recognised the need of analysing the business
environment for the purpose of developing and implementing the strategy. Here we will consider the
requirement in specific context to external environment that has sub-set of remote and industry
operative environment.
External environment comprising the factors that are beyond the control of organisatio n (outside
organisation boundary) but having influences on organisation, its performance and strategic
positions.
Prior to start with external environment analysis, it is essential for business firms to define the
industry in which they are operating and setting out the dimensions of remote and industry operative
environment.

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An industry is a group of companies that are relatively comparable based on their primary
business activities or can be seen as a group of organisations or business units participating in
similar economic or commercial activities, producing similar products or services. Here it is important
to there is no single universally acceptable definition of industry. Further what industry will comprise
of, depends upon the width and depth of business firm.
To illustrate until McDonald was working in USA their industry analysis was reserved only up till the
customer and fast food chains operating in US, the moment they decided to go beyond borders
(continent of Asia, Europe, and Australia etc.) the scope of industry has been changed not the factors
of those continents or countries also become relevant.
Hence, any single economic definition of industry can’t be relied here; business organisation in light
of competitive market and sees itself wherein it is operating need to come-up with their own concept
of industry.
To illustrate, Rapido (two-wheeler ride app transport company) may not consider Ola or Uber (four-
wheelers ride app) its com as it competitors hence restrict scope of industry to other two-wheelers
ride provides only, but reciprocally it may possible that Uber consider Rapido a competitor and also
include two-wheeler ride providers in its industry analysis.
Therefore, scope of industry (definition with narrow or wide inclusions) is subjective issue. Narrow
scope may make analysis more manageable, but exclusion of relevant substitutes or disruptive
influences may make it meaningless; whereas wide scope of industry can ensure more relevance
and utility but will be more resource consuming and complex. Cost benefit analysis came into play
here.
For further analysis, the external environment usually broken down into two sub-sets, called the
remote environment and the industry operating environment including the competitive
environment.
The element of remote environment such as social, technological, economic, environmental,
political, legal, and ethical factors (STEEPLE) comprises factors that originate beyond (& usually
irrespective of) any single firm's operating situation. Remote environment presents firms with
opportunities, threats, and constraints, but rarely does a single firm exert any meaningful reciprocal
influence.
By working systematically through each of the remote environment elements business should have
a comprehensive list of factors that have shaped the historical growth of the industry and are likely
to affect the future growth of the industry.

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Illustration – Due to technological advancement, the mobile phone changed dramatically from
QWERTY keypad to Smart Phones (touch screen phones with better battery backup, internet
connectively and camera functionality, etc.) Nokia which was market leader once and hold
substantial market share at then failed to make reciprocal (on changing telecom/phone technology)
influences and replaced by Samsung. Hence remote environment is beyond the control of single
firm operating in industry. Same factor (technology in this case) bring threat for one (here in Nokia)
and opportunities for other (here in Samsung).


Concept Insight
Industry analysis was conventionally performed using the PEST Framework i.e., Political,
Economic, Social and Technology, but this approach has been evolved to reflect dynamics of the
business environment, to PESTEL with add-on of environment and legal issues and now to
STEEPLE with add-on of ethical aspects.
Further as part of analysis of industry operating environment (including the competitive
environment), it is important to consider all the factors (within the particular industry) that affect
industry profitability as well as competitive position of business organisations within it. These
factors can be grouped into elements such as customers, competitors (as well as potential entrants),
suppliers, advocacy groups, regulations, regulatory groups and many other elements such as
industry life cycle, supplier’s suppliers and buyer’s buyers, etc. Basically, it considers the wider
picture through factors that are capable to decide the growth trajectory in addition to future
profitability.
Hence, further in this section we will consider the forces that determine the profitability of industry,
basis of competition and key success factors that can help business organisations to gain
competitive advantage apart from understanding how customer and market behav e as well as
related aspects thereto in context of external environment.
1. Industry Profitability
Michael E Porter13 suggests five force model to assess the intensity of industry competition.
Industry structure (or environment) analysis highlights the profitability potential of any industry using
Porter’ five force model. Higher the intensity of competition results in lower potential profitability and
vice-versa. The five forces which are enumerated by this model are pictured below –


13 In 1980 in his book Competitive Strategy - Techniques’ for analysing industries and competitors

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Figure C.1 - Forces Driving Industry Competition 14

Competition in an industry continually works to drive down the rate of return on invested capital
toward the competitive floor rate of return, or the return that would be earned by the economist's
"perfectly competitive" industry. This competitive floor, or "free market" return, is approximated by
the yield on long-term government securities adjusted upward by the risk of capital loss.
1.1 Bargaining Power of Buyers
Bargaining power of buyers determines the ability of buyers to dictate terms including price.
Bargaining power will be high if cost of switching supplier is low, buyers are less and buys in high
volume from small suppliers. High bargain power may lead to low prices or high cost, hence results
in low margin. A buyer group is powerful if the following circumstances hold true:
▪ It is concentrated or purchases large volumes relative to seller sales.
▪ The products it purchases from the industry represent a significant fraction of the buyer's costs
or purchases.
▪ The products it purchases from the industry are standard or undifferentiated. Moreover . the
industry's product is unimportant to the quality of the buyers' products or services .
▪ The buyer has full information. It faces few switching costs.
To illustrate - Bargaining power of buyers in the ‘airline’ industry is high. Customers are able to
check prices of different airline companies fast through the many online price comparisons websites.
In addition, there aren’t any switching costs involved in the process.


14 Figure 1-1 at p.4 of Competitive Strategy - Techniques for analysing industries and competitors (1980) by Michael E Porter



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1.2 Bargaining Power of Suppliers

Bargaining power of suppliers determines the cost and quality of input. Bargain power is high if
replacement or alternate is not available. A supplier group is powerful if the following apply:
▪ It is dominated by a few companies and is more concentrated than the industry it sells to.
▪ It is not obliged to contend with other substitute products for sale to the industry.
▪ The industry is not an important customer of the supplier group.
▪ The suppliers' product is an important input to the buyer's business.
▪ The supplier group's products are differentiated, or it has built up switching costs.
To illustrate - The bargaining power of suppliers in the ‘airline’ industry can be considered very
high. When looking at the major inputs that airline companies need, we see that they are especially
dependent on fuel and aircrafts.
1.3 Threat of Substitute Products or Services
Threat of substitute may cause loss of revenue (top-line) or increased cost of retention. Threat will
be high, if substitute is prefect in nature and cheaper. Substitute can be from different segment and
different industry. Switching cost and perceived level of product differentiation are also relevant here.
To illustrate - In terms of the ‘airline’ industry, it can be said that the general need of its customers
is traveling. It may be clear that there are many alternatives for traveling besides going by airplane.
Depending on the urgency and distance, customers could take the train or go by car. People in East
Asia (also in South-East Asia) prefer to use high speed trains, even for long distance as well.
1.4 Threat of New Entrants
New entrants to an industry bring new capacity, the desire to gain market share, and often
substantial resources. Hence, threat of new entrants may damage the market share if materialised.
Degree of threat depends upon barrier to entry coupled with the reaction from existing competitors
that the entrant can expect apart from perceived profitability. The major sources of the barriers to
entry are economies of scale, product differentiation, capital requirements, switching costs, access
to distribution channels, government policy etc.
To illustrate - The threat of new entrants in the ‘airline’ industry can be considered as low to medium.
It takes quite some upfront investments to start an airline company especially in purchasing aircrafts.
New entrants also need licenses, insurances, access to distribution channels that are not easy to
have/get when you are new to the industry.
1.5 Rivalry among Existing Firms
Rivalry occurs because one or more competitors either feels the pressure or sees the opportunity to
improve position. Competitive moves by one firm generally have effects on its competitors and thus
may incite retaliation or efforts to counter the move; that shows firms are mutually dependent. This
pattern of action and reaction may or may not leave the initiating firm and the industry as a whole
better off. If moves and countermoves escalate, then all firms in the industry may suffer a nd be
worse off than before. Intensity of competition/rivalry will determine the effect on profitability or
market share. Competition will be stiffer if number of firms are more, extra capacity exists, and
products are homogenous, high fixed cost and high exit barriers.

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To illustrate – As far as Indian ‘Airline’ business is concerned, the industry is extremely competitive
because of a number of reasons which include the entry of low cost carriers, the tight regulati on
leading to high fixed costs and high barriers to exit. As same time the switching cost is low or nil for
passenger hence rivalry become more intensive and stiffer. The passenger market share in Indian
Aviation Industry on Jan 2015 and Oct 2022 given below for reference–
January 2015 October 2022
Airline Total 6.2 million passengers Total 11.4 million passengers
carried during Jan 2015 carried during Oct 2022
Air India 18.7% 9.1%
Vistara 0.2% 9.2%
Air Asia India 1.3% 7.6%
IndiGo 36.4% 56.7%
Spice jet 9.4% 7.3%
Jet Air 19.6% -
Go Air 8.9% -
Jet Lite 4.5% -
Go First - 7%
Alliance Air - 1.3%
Source: Indian Express Dated 4 th December 2023 p.13 Economy


Concept Insight
Inter-connectedness of Barriers (Exit Barriers and Entry Barriers) and Profitability- Although exit
barriers and entry barriers are conceptually different, their joint level is an important aspect of
the analysis of an industry. Often exit and entry barriers are related. Substantial economies of
scale in production, for example, are usually associated with specialized assets, as is the
presence of proprietary technology. Taking the simplified case in which exit, and entry barriers
can be either high or low refer Figure C.2.


Figure C.2 – Barriers and Profitability


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All five competitive forces jointly determine the intensity of industry competition and profitability, and
the strongest force or forces are governing and become crucial from the point of view of strategy
formulation.
To illustrate, even a company with a very strong market position in an industry where potential
entrants are no threat will earn low returns if it faces a superior, lower -cost substitute. Even with no
substitutes and blocked entry, intense rivalry among existing competitors will limit potential returns.
The five forces enumerated by Porter’s five force model are keep-on changing, this makes model a
dynamic analytical tool.
Porter’s Five Forces is a good starting point to evaluate an industry but should not be used in
isolation. You could for example combine it with a Value Chain Analysis or through the VRIO
Framework in order to get a better sense of where your company’s competitive advantage is coming
from and to better position your company between the rivals. Moreover, Porter’s Five Forces is often
combined with the STEEPLE analysis to give a good overview of the organization’s environment.
 Note – Students are advised to refer to Annexure comprising list of Porter’s Five Forces factors.

2. Understanding Customers and Markets

After assessing the profitability and growth potential of an industry, the industry analysis extends to
developing the understanding of customers and markets. The need & importance of understanding
customers and markets as well as segments thereof is inevitable, because f or a business firm it is
not always beneficial to be operative in all the segment of market, a strategic choice can be made
to decide in which segment firm will operate. Hence segmentation analysis is relied upon to identify
the primary area of operations.
2.1 Market, Market Segment and Market Segmentation Analysis
2.1.1 Market

Market consists of business firm that is selling the product or rendering the services in addition to
buyer who is buying/hiring them. Market can be physical (wherein brick and mortar stores exist) or
may be virtual (based upon e-platform). There may be many sellers and buyers, or only a few
handful. Market also includes potential buyers.
2.1.2 Segment or Market Segment
A market segment is a category of customers who have similar likes and dislikes in an otherwise
homogeneous market. In order to be recognised as segment, the following criteria shall be
satisfied–

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▪ The segment should be homogeneous internally in terms of constituents (may be their

demographic character, behaviour, trait, or any other basis of segmentation).
To illustrate, Fabric or readymade clothing firms having kid/children ranges in addition to male and
female collections. These segments are homogeneous internally for first segmentation age is basis,
whereas for later two gender is basis; all the three segments are demographic segment in nature.
▪ The segments should be heterogeneous externally in terms of other segments. Each segment
must be different from the others.
To illustrate, Passenger vehicle and commercial vehicle for automobile company. Now electronic
vehicle is also seen as entirely separate segment. In given example all the segments are
heterogeneous externally based upon user (or purpose of use) and source of energy/power (fuel
vs. electricity).
▪ Segment shall be clearly identifiable. Business firm must be able to distinct between group
members and non-group members. The character of group members due to which they fall under
particular segment shall be consistent. Basis of segmentation shall be strong enough to make
identification easy.
▪ Segment size shall be reasonable if not substantial, at least of sufficient size so that specific
marketing efforts can be made considering potential profitability. Mind it any size can be considered
as reasonable, if it can be operated profitably.
To illustrate, Rolex Watches, Roll-Royce Cars.
▪ Segment must be responsive in sense, it must response/react to marketing offerings.


Do You Know?
What benefits Market Segmentation provides?
Benefits of market segments includes create stronger marketing messages, identify the most
effective marketing tactics, design hyper-targeted ads, attract (and convert) quality leads,
differentiate your brand from competitors, build deeper customer affinity, identify niche market
opportunities, stay focused.

2.1.3 Segmentation Analysis or Market Segmentation Analysis

Market segmentation is the process of dividing a broad target customer base or business market,
into small but more defined sub-groups of customers based on some type of shared characteristics
such as demographics, interests, needs, or location.
We already learned in previous section of this chapter that Value Proposition Canvas is helpful in
observing the customer’s characteristics, those characteristics can be used as basis of
segmentation, for effective market segmentation.


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2.2 Basis of Segmentation

2.2.1 Product segmentation deals with grouping the customer based upon the different
product/assembly in which firm deals or feature thereof.
To illustrate, Automobile industry operates in different product segments such compact, wagon,
sedan, and SUVs (product); segmentation can be done based upon feature of products such as
commercial or passenger vehicle; also, upon based upon fuel based vehicle or electronic vehicle.
2.2.2 Demographic segmentation rely upon the characters such as Age, Gender, Family Situation,
Education, and Ethnicity to group the customers.
To illustrate, Services that are person oriented and of personal use such hair salon and product to
be used as personal effects such as apparels and accessory, usually do segmentation based upon
demographic characters.
2.2.3 Psychographic segmentation is based upon the basis such as Personality traits, Values,
Attitudes, Interests, Lifestyles, Influences, Subconscious and conscious beliefs, Motivations,
Priorities.
To illustrate Airline companies, offer travel in three classes i.e., Economy, Business and first class;
builders can also do psychographic segmentation based upon lifestyles (in addition to income that
effect lifestyle i.e., Low Income Group, Middle Income Group or Higher Income Group to offer LIG
or MIG flats, so on and so forth).
2.2.4 Behavioural segmentation using the characteristics such as purchasing habits, spending
habits, status, brand interactions for grouping the customer base into segments.
To illustrate E-commerce platform such as Flipkart differentiate their plus/prime members from
others (based upon purchasing habits i.e., quantum and frequency); Clubs used to offer silver, gold,
prime, premium, platinum memberships (based upon spending habits/slabs).
2.2.5 Geographic segmentation is based upon the ZIP code, City, Country, Climate, Urban or rural
of customers.
Although STP (segmentation, targeting and positioning) is a marketing approach where business
segment their audience, target the best-fit audience segments for your product, and position your
product to capture your target segment effectively; but has strategic context and substantial cost
implication.
It is commonly observed that non-marketers in the business organisation are often stick to what the
organisation can produce, and not ready to consider what customers actually want. This attitude
become focal shortcoming in planning and executing strategies pertaining to segmentation, targeting
and positioning. All leaders and managers in the organisation need a thorough understanding of
customer needs and what drives demand, as it is critical in designing strategies and developing
capabilities to meet those needs. To understand what drive the demand, the basis of competition
need to be decoded.

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3. Basis of Competition
Competition is a situation where two or more people or organizations are trying to achieve, obtain,
etc. the same thing or to be better than somebody else. The Competition can be natural or strategic.
Natural competition arises in process of evolution and refers to survival of the fittest as stated in
beginning of this section. Natural Competition forced the weaker rivals to exit from market or they
collapsed in search of survival; only those able to sustain who either adapt the change, counter the
change, or make the change. Whereas strategic competition deals with deployment of resources,
based on a high degree of insight of a business system.
Basis of competition is that reason why customer of particular business chooses it over its
competitor. It can be product, feature, function, style, availability or a host of other things. Once a
business done with the industry analysis and also developed an understanding of the market and
customer, business organisation may be able to identify what exactly drives demand, choice,
price and cost; assess the current and potential risks that may affect future developments in the
industry; and discover what underpins sustainable competitive advantage.


Do You Know?
Determining basis of competition may involve asking certain questions, such as -
▪ What drives demand for the products and services of the industry?
▪ How customer make choice as to price, feature, and quality of product?
▪ How is price determined in the industry?
▪ What are the main drivers of cost in the industry?
▪ What are the current and potential risks?
After assessing the competitive forces in particular industry and determining the basis of competition
in the market wherein business operate, it can easily identify the key success factors (KSFs) to gain
competitive advantage in that industry and also ensure availability of resources and core-
competency involved in KSFs to compete in the market and to generate sustainable competitive
advantage.
4. Industry Key Success Factors
There are certain factors in every industry that are critical to success of any business organisation
in generating and sustaining competitive advantage. Availability of resources and core-
competencies pertaining to such factors and strategic use thereof, can really help organisation to
outperform its peer (or competitor) in target market. Such factors are called Key Success Factors
(some time Critical Success Factors i.e., CSFs). In effect, it articulates what the company must
do, and do well, to achieve the goals outlined in its strategic plan. Examples would include agility,
reliability, diversity and emotional connection with clients.

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Further with each CSFs, Key Performance Indicators (KPIs) are attached to measure the
performance of business organisation regarding said CSF.
To illustrate, cycle time is critical or key success factor in many businesses, lead time or run time
shall be attached as KPI to the CSF of time.
Key success factors are one of three elements a company’s management team must articulate as
part of its strategic planning process, with the others being its strategic goals and its strategic scope.
Under dynamic business environment, with the passage of time Key Success Factor may change;
therefore, change the discourse of that market or industry, hence business firms need to be aware
about the change (in assessing them and adapting them or responding them) and periodically re -
assess the CSFs.
To illustrate, Nokia was undisputed market leader in mobile phone industry when critical success
factors was reliability and efficient distribution networks. With launch of touch screen smart phones,
the dynamics of industry has been changing because user start considering phone for receiving and
send emails, play music, take photos, and even search the internet. Resultantly R&D, Screen Size,
Megapixel of camera, etc. become new Key Success Factor. Nokia failed to excel in such CSFs and
replaced by Samsung and others.
5. Core-Competencies Analysis
Core Competency is a unique preposition which help firm to stand ahead in industry by serving value
to its customers. Core Competency leads to either cost leadership or product differentiation, which
are primary source for firm to gain competitive advantage.
Prahalad and Hamel15 suggests that "Core Competences" are some of the most important sources
of uniqueness: these are the things that a company can do uniquely well, and that no -one else can
copy quickly enough to affect competition.
Prahalad and Hamel used examples of slow-growing and now-forgotten mega corporations that
failed to recognize and capitalize on their strengths. They compared them with star performers of
the 1980s (such as Canon and Honda), which had a very clear idea of what they were good at, and
which grew very fast. As they switched effort away from areas where they were weak, and further
focused on areas of strength, their products built up more and more of a market lead.


Do You Know?
What can be source of core competencies?
Core competencies can be arisen out of-
▪ Resources – Which firm has, and other don’t.
▪ Capabilities – Ability to co-ordinate resources and optimal use of same.


15 C. K. Prahalad and Gary Hamel (1990) "The Core Competence of the Corporation”

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5.1 Test of core competency contains three parameters

Relevance – The competence must give your customer something that strongly influences him or
her to choose your product or service. If it does not, then it has no effect on your competitive position
and is not a core competence.
Difficulty of imitation – The core competence should be difficult to imitate. This allows you to
provide products that are better than those of your competition. And because you're continually
working to improve these skills, means that you can sustain its competitive position.
Breadth of application – It should be something that opens up a good number of potential markets.
If it only opens up a few small, niche markets, then success in these markets will not be enough to
sustain significant growth.


Do You Know?
How core competencies can be exploited?
▪ Validate (ensure, establish and exploit) core competencies in current business.
▪ Leverage competencies to the value chains of other existing businesses/segments .
▪ Use core competencies to reconfigure the value chains of existing businesses – basically keep
on improving e.g., Amul came-up with Amul Moti that has larger shelf life.
▪ Use core competencies to create new value chains.

D. INFORMATION TECHNOLOGY THE STRATEGIC CONTEXT

The impact of the technology transformation can be seen in pioneering industries such as music
(digital products are delivered via digital channels), media (traditional print news media is already
on downward spiral, media giant Facebook does not create any content), retail (brick and mortar
stores are getting replaced with online e-commerce stores, today one among the largest retailers
Alibaba does not own any inventory), taxi services - online ride aggregators are changing the
dynamics of traditional taxi services, Uber does not own any taxis and electric cars are changing the
dynamics of entire auto industry - imagine no car recalls but OTA software updates to fix the issues.
Signs of similar digital transformation can be seen across most of the industry domains.
Moreover, data is considered to be new oil, hence collecting and processing (in addition to storing
& exchanging) data (or big data) to construct useful information out of same, through business
analytics or any other mean is essential to make informed decisions and strategic choices;
therefore, use of information technology in strategic context is inevitable.
There are three concepts that are involved here, Information Technology (IT), Information System
(IS) and Information Management (IM), all three are inter-connected; but not same. Information
technology techniques are used as part of information system to manage information. Organisations
develop strategies to ensure alignment among these three and overall organisational strategy in
place.


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Information Systems (IS) are collections of multiple information resources (e.g., software,
hardware, computer system connections, the system housing, system users, and computer system
information) to gather, process, store, and disseminate information. IS strategy is concerned with
aligning IS development with business needs and with seeking strategic advantage from information
technology. It is usually formulated at the same level as product/market strategy for the SBU. It
deals with resource planning to ensure IT layout shall be put in practice.
Information Management (IM) concerns a cycle of organizational activity, the acquisition of
information from one or more sources, the custodianship (role and responsibilities of those deals
with information) and the distribution of that information to those who need it, and its ultimate
disposal through archiving or deletion. IM strategy trying to 'put management into IT' by defining the
role and structure of the IT activities in the organisation. It is concerned with the management
controls for IT, management responsibilities, performance measurement and management
processes. Here it is decided who can assess the data and who can’t. It formulated at organisation
wide level. It deals with control over the layout of IT uses in organisation.
Information Technology (IT) is the use of computers to create, process, store, retrieve, and
exchange all kinds of data and information. IT forms part of information and communications
technology. IT strategy (information technology strategy) is a comprehensive plan that outlines how
technology should be used to meet IT and business goals. It is usually prepared at activity level. It
decides the layout of use-cases of IT in the organisation.
Michael J Earl16 developed a framework to analyse the linkages and distinction between three
interrelated types of strategy: Information systems, Information management and Information
technology.
The linkage expressed by him is concluded into following table for reference –

Basis IS Strategy IT Strategy IM Strategy

Resolve (Scope) What How Where
Driven Force Business Driven Technology Focused Management Driven
Directional Top-Down Bottom-up Multi-directional
Orientation Demand Oriented Supply Oriented Relationship Oriented
Organisational Division/ SBU/
Activity based Organisation wide
Level Function based


 


16 Management Strategies for Information Technology by Michael J. Earl; Prentice Hall, 1989 (Page 63)

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Do You Know?
Why do firm supposed to have IT/IS strategy?
Apart from having ability to impact business at all levels, the need to have IT/IS strategy observed
due to followings –
▪ They are capable to create competitive advantage and sustain them for long. Use of IT can
help organisation in countering industry five forces (identified by Michael E. Porter) in more
appropriate manner.
▪ IT is a dynamic stream, lot of new technologies in wake of industry 4.0, like Big Data, IOT,
IOS, Blockchain are coming into play; business can used them to tap new opportunities. To
illustrate; Fintech with use of technology revamp the BFSI sector.
▪ The cost involved in Information Technology tools and establishing Information System is
high. Most of decisions pertaining to IT/IS are not only involves huge investment but also
irreversible in nature. Even a single error or mistake can be risky affair.
▪ For better integrated across value chain and supply chain, the IT/IS are essential. For effective
value and supply chain flow of information is foremost requirement, which can only be assured
through use of IM for which appropriate IT/IS strategies are underlying needs.
▪ Use of IT make change management easy. For efficient change management the timely and
accurate communications are of great importance, hence a strategic context of IT/IS multi-
folds.
Based upon points discussed so far, one thing, that we can concluded is that IT collectively with IS
and IM has potential to transform the business around the corners. Let’s see its impact of IT and IS
specifically in case of Michael E Porter’s Five Force and Value Chain –

1. IT/IS and Porter’s Five Forces

Concept of Porter’s Five Forces Model is explained in detail in earlier sections of this chapter. Here
we will consider, how IT/IS impact said five forces of competitive environment in which an
organisation operates–
1.1 The Threat of New Entrants
New firm/s (competitor) can enter into market and causing threat to existing players because new
entrants who enters into a market will bring extra capacity and intensify competition. The degree of
the threat from new entrants will depend upon the strength of the barriers to entry and the likely
response of existing competition to a new entrant.
Hence an organisation needs to answer, how best it can take care of the threat of new entrants?
Information Technology can have two possible roles to counteract the threat.

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1.1.1 Creating barriers (existing players)

Sophisticated IT applications are expensive, takes time to develop (imitate) and technically
challenging to understand for new player. Hence using IT (especially computer-controlled
production), existing players can increase economies of scale by using methods, therefore requiring
an investment of similar value by new entrants.
1.1.2 Breaking down the barriers (new entrants)
Information technology can be used as tool and weapon by new entrants.
To illustrate, Reliance Jio came into the market with 4G technology using Volte. In banking industry,
Internet Banking, Mobile Banking and Use of Automated teller machines (ATMs) reduced the
banking at branch hence cost of establishing branches can be saved by new entrants. In addition, it
will be new sort of distribution channel which is free from control of existing players.
1.2 Supplier’s Bargaining Power
Supplier has influence over cost (price charged by them), quality and availability of input, this
influence is terms as bargaining power. The degree of bargaining power of suppliers will be based
upon the number of suppliers, availability of substitute, switching costs, uniqueness of brand,
technical performance or design not available elsewhere.
Information Technology can rely upon to identify the new suppliers and e-procurement, or tendering
system can be adopted so that preventions from cartelisation of suppliers ca n be ensured. Now-a-
days knowledge management or commercial database companies are providing the paid purchases
database that enables organisation to identify the potential suppliers with easy scanning of prices
from a number of suppliers. Business also uses IT to automatically rotate orders between suppliers,
compare prices on the internet e.g., India Mart.
IT is intensively used to realise the concept of integrated supply chain as a reality. Strategic or
operational alliance are formed with the vendors and access of ERP extended to include them as
part of larger supply chain.
1.3 Buyer’s Bargaining Power
Buyers (Customers/Clients) has influence on revenue stream of the business organisation. The
degree of bargaining power determines the ability of buyers to dictate terms including price. Degree
of bargain power will be high if cost of switching supplier is low, buyers are less or buys in high
volume from small suppliers. High bargain power may lead to low prices or high cost, hence results
in low margin.
Information Technology can be used in many ways by business organisation to reduce or counter
the bargaining powers of buyers. IT may be used to improve customer service, for example by
allowing on-line ordering.
1.3.1 Customer Data Warehousing and Mining – The large volume of data regarding customer
choice, preference, buying pattern (habit) are collected and stored (data warehouse) to extract the
relevant data (from said data warehouse) as the source for direct and target marketing drives.
To illustrate, Amazon or Flipkart suggest you the items based upon your purchase history .

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1.3.2 Lock the Customer – IT can be used to lock the customer either by–
▪ Scheme of rewards, loyalty bonus and cash back etc.
To illustrate; Flipkart offers plus status to some of its high value customer, giving them early access
of offers and 2times of bonus coins for every purchase. Some of the store/businesses offer promo
discount on first (or few initial) orders from their app. On Airtel recharge user gets Airtel Money,
such money is sort of digital currency that can be used only for shopping on Airtel app/store.
▪ Configuration and compatibility of product are adjusted in such way that use of spare necessarily to
be of same manufacturer (of main/principal product) or cost of switching will be too high.
To illustrate; in Apple i-phone, apps from google play store don’t work. If for accounting and control
of your business, you are using SAP and willing to shift to Oracle, transacting data from SAP to
Oracle is costly and time consuming affairs (especially using plugin to save back-up data).
1.4 Threat of Substitutes
Threat of substitute products or services may cause loss of revenue (top -line) or increased cost of
retention. Threat will be high, if substitute is prefect in nature and cheaper. Substitute can be from
different segment and different industry. Switching cost is also relevant here. IT and IS itself
substitute to many products.
To illustrate; laser printers are fast and prefect substitute of dot-matrix printers; Kindle replaces the
hard cover or paper bound books; and every other technological innovation.
Note - Threat applies both between industries (e.g., rail travel with bus travel and private car) and
within an industry (e.g., long-life milk as substitute for delivered fresh milk).
But technology can also be used to counter the threat of substitutes. Have you ever thought that if
Nokia upgrade itself to smart phone manufacturer, then it may resist or counter the Samsung to
replace as market leader. Why Apple i-phone continually coming with new model so that their
imitation become difficult. The threat from substitutes can be minimised by ensuring that an
organisation develops a product before its rivals and then protects that product for a number of years
by means of patents. This approach is widely used in the pharmaceutical and biotech industries
where specialist software is now widely used in the drug discovery process, enabling drugs to be
developed that target specific human and animal diseases. Basically, firms can use computer-aided
design and manufacturing to develop new products first and remain ahead of their competitor.


Practical Insight
Google within a couple of years, sold Motorola, the iconic handset maker to Chinese PC maker
Lenovo for $2.91 billion that it bought for $12.5 billion. Reason being IPRs and R&Ds that Motorola
have, transferred in Google’s favour. Google used that technology or knowledge as resource to
stay ahead of its rival, therefore counter the threat of substitute.

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1.5 Competitive Rivalry

All the four forces may come together to produce this force. Intensity of competition (if really intense,
called rivalry) will determine the effect on profitability or market share. Competition will be stiff if number
of firms are more, extra capacity exist, product are homogenous, high fixed cost and high exit barriers.
The most intense rivalry is where the business is more mature and the growth has slowed down.
All the resources at a company's disposal may be put in to maintain market shares and sales,
including IT resources. Cost leadership can be exploited by IT using JIT, ERP, and MRP etc. for
example, where IT is used to support just-in-time (JIT) systems. IT can also be used for collaborative
venture that make organisation too big to fail or reduced the competitor’s motivation and effect.
To illustrate, Make My Trip and OYO come together as travelling and stay partner. IT can also be used
for relationship building with client and customers so that they remain engaged with organisation this
automatically reduce the threat from rivals, for these online notifications may be used.
To conclude, Business Organisation can use IT/IS to transform business and it aspects to reduce
and counter five forces, while outperform its peers or rivals.
2. IT/ IS and the Value Chain
Concept of Value Chain is explained in detail in earlier sections of this chapter. Here we will consider
how IT/IS impact the value chain.
Value Chain is the sequential chain of activities which leads to delivery of final product to the
customer, it also depicts how value (utility) accumulates to customer. It consists of primary activities
and secondary activates, IT/IS has bearing on each activity in a number of different ways.
2.1 Primary Activities
2.1.1 Inbound logistics deals with receiving, storing and handling raw material and other inputs
(mind it not with procurement). Bar coding system can be used to automate the warehousing. Concept
of virtual warehouse is also getting recognition, wherein several outlets or stores of organis ation are
connected through an information system which indicates the total inventory levels. RFID (Radio-
frequency identification uses electromagnetic fields to automatically identify and track tags attached
to objects. An RFID system consists of a tiny radio transponder, a radio receiver and transmitter) can
be used to track items in trading concerns throughout the supply chain. MRP, ERP can be used as
information system for resource planning whereas JIT can be practice for stock control.
2.1.2 Operations includes transformation of raw materials into finished goods and provisioning of
services. Foremost step is designing wherein CAD (computer aided designing or design thinking is
helpful. CAM (computer aided manufacturing) is used to plan for material and capacity apart from
production control. Robots can also be used to make process automated or contactless, for same CIM
(computer integrated manufacturing) to control machine tools and automated guided vehicles can be
relied upon. It is not only manufacturing but even services entities are also using IT in their operation.
To illustrate; Coursera offering course online entirely. Zomato is operating through app for booking
the food. Banks replace the cash teller with ATMs and for updating passbooks there are Kiosk.

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Practical Insight
Restaurant and Robots
Robots can also be used for more customer-facing tasks such as taking orders and collecting
payments, or even serving food and drinks. One restaurant that has embraced robotics is YO!
Sushi, a Japanese chain with locations in the UK, US, and Australia.
The Wingman joins hamburger-making robots like Flippy from Miso Robotics that White Castle
recently bought for 100 of its locations and other kitchen robots that are automating food
processing, cooking, and presentation, particularly in fast food settings.
Note – As per [Link] the Robot-as-a-Service (RaaS) program starts at $1,215 per month
and it includes shipping, onsite installation, training and unlimited ongoing support.

2.1.3 Outbound logistics covers storing, distributing, and delivering finished goods to customers.
Apart from bar-coding system or RFID, information technology is used for vehicle scheduling and
automated warehousing.


Practical Insight (on inbound and outbound logistics)
United Parcel Services (UPS) a logistic company implement the world’s largest wireless network.
(Reduce paperwork and improve sorting and tracking – helps in resource planning in term of
capacity at hub – timely information)

2.1.4 Marketing and sales activities comprises market research and the marketing mix (product,
price, place, promotion). Customer databases are maintained digitally for ease in market
segmentation, apart from analysing habits of customer and trends therein. Together these make
CRM (Consumer Relations Management) easy.


Do You Know?
Having a website that too working seamless on all the devices help you to outperform.
As per [Link]
▪ 75% of consumers admit to making judgements on a company’s credibility based on the
company’s website design.
▪ 83% of mobile users say that a seamless experience across all devices is very important.
▪ Mobile ecommerce revenue accounted above 50% of total U.S. e-commerce revenue.
Digital marketing, social marketing, internet marketing and viral marketing is gaining importance.

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Practical Insight
Nike started with a more effective use of analytics, focusing on digital consumer data. They also
updated their ecommerce strategy with things such as improved UX (user experience) and better -
adjusted membership options. Their offline activities corresponded with online marketing strategy.
Nike focused on delivering a unique experience to shoppers who visited their offline stores,
especially the flagship stores.
2.1.5 After-sales service includes all those activities that occur after the point of sale, such as
installation, training, and repair. Computer system can be relied for scheduling repairs. Further IoT-
enabled remote service software helps manufacturers of equipment, machines, and complex devices
to monitor their products and provide after-sales product support and maintenance at the customer
sites. Such solutions often integrate with a manufacturer’s asset management software, ERP, and
customer service module; thereby reduce down time and transportation cost.
2.2 Secondary Activities
2.2.1 Firm infrastructure deals with organisational structure which can be improved through
collaborative workflow using Intranets, Electronic scheduling, Office automation systems and any
ERP (Enterprise Resource Planning) be it SAP, ORACLE, Baan, PeopleSoft for identifying and
planning the enterprise-wide resources needed to record, produce, distribute, and account for
customer orders.
2.2.2 Technology development describes how the firm uses technology; therefore, this includes
IT/IS strategies. For state roadways buses now online ticket booking is available this helps in better
management apart from reducing the risk of fraud (involved in using manual tickets), NPCI along
with Gas companies (or agencies thereof) on behalf of government using DBT (Direct Benefit
Transfer) to reduced flaws and frauds. Mind it here the technological advancement of primary and
support services considered not of product that will be covered under operations.
2.2.3 Human resource management describes how people contribute to competitive advantage.
There’s a range of technologies that are impacting HR practices, some of the most interesting and
disruptive technologies are powered by artificial intelligence & automation.


Do you know? Human Resources technology (popularly known as HR Tech) is a buzz now.
HR Tech refers to the software and hardware technology used to automate essential HR functions.
HR tech functions as co-pilot, helping HR professionals streamline time-consuming tasks, including-
▪ Payroll management.
▪ Talent management - AI is making recruitment smarter.
▪ Applicant tracking systems.
▪ Learning and development.
▪ Performance management - Analytics drive better performance management.
▪ Employee engagement - Better analytics boosts diversity and inclusion.

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Practical Insight
The global HR technology venture capital has topped $3.1 billion this year, more than triple the
amount invested in 2017.
2.2.4 Procurement signify purchasing, but not just limited to materials. Techniques like Electronic
Data Interchange for exchanging information with vendors for auto-supply and e-procurement or e-
tendering for receiving and appraising Expression of Interest (EoI) from vend or proven handy.


Practical Insight
The Ford Motor was the first automobile company that has set up the Computer Aided Designing
module in association with its suppliers, with the intent to provide them clarity on design specification
so that the costs (time and monetary resource) of design and changes can be reduced.


Do You Know?
Not only private enterprises, who are working solely/substantially for profit motive; but even public
enterprises also who are having twin objective of economic growth and social welfare are using
technology to be cost efficient. This is evident from the launch and use of Central Public
Procurement Portal ([Link] for e-procurement by Government of
India. The e-Procurement System enables the Tenderers to download the Tender Schedule free
of cost and then submit the bids online through this portal.
In the end, this can be concluded that IT/IS has capabilities to revamp the value chain and empower
the organisation to tap the opportunities for creating greater values.

E. THE ROLE OF MANAGEMENT ACCOUNTANT AS A LEADER

As business environments changed, new organizational structures and management styles
emerged, and as a result, the role and responsibilities of business managers changed dramatically.
The role of management accountant has also undergone a substantial transformation. Now the
Management Accountant assumes the role of business leader.
Management accountants lead from the core of business, working within organizations to identify
opportunities, reveal insights, and make the big strategic decisions that shape a business’ future.
Hence, aspects like communication, decision-making, and business ethics that are part of the
Management Accountant's behaviour become critical to the success of his or her organisation. In
this section, after considering the transformation of the role of a Management Accountant, the
behavioural aspects specified above will be discussed.
Since the business organizations face various complicated challenges in dynamic business environment,
the capabilities of their managers should be of the level so that can take-up the challenge.


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1. The Transforming Role of the Management Accountant

Traditionally the roles of Management Accountant prominently include–
Role # 1. Stewardship Accounting
Role # 2. Long-term and Short-Term Planning
Role # 3. Developing Management Information System (MIS)
Role # 4. Maintaining Optimum Capital Structure
Role # 5. Participating in Management Process
Role # 6. Providing Ease in Control
Now-a-days business require such a management accountant who report the key figures, with in
depth analysis and provide fresh perspectives by "telling a story" about the reported data to propel
the business ahead; hence role of management now also includes;
Role # 7. Analysis
Role # 8. Planning
Role # 9. Innovation
Role # 10. Leadership
Therefore, Management Accountant is a position that holistically addresses the various aspects,
which affect the sustainability of a business's performance. Along with budgeting, forecasting,
management of performance, and control of internal processes, the management accountant
impacts the decisions related to strategies, operations, and technology as a business leader.
If accounting is truly a language of business, then management accountant is indeed poet, who
appreciate value and numbers.
The management accountant is at the crossroads of technology, financial analysis and strategy, and
leadership, helping to identify what is driving the company's profits and losses, rather than simply
reporting them.
The management accountant goes an additional step beyond reporting and assists the C-Suite (Top
management; the group of officers of a business organization who have the word "chief" in their
titles) to figure out the most effective route to growth and stability; to develop strategies for growt h
in the long run by translating the lofty "big picture" goals into tangible operational and financial
actions.

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Technology

Strategic Management Financial

Planning Accountant analysis

Leadership

Figure E.1 - Management accountant is at the crossroads of technology, financial analysis and strategy, and leadership

1.1 Analysis - To offer new insights and vision

Management accountants through analysis of financials (and non-financial information as well) can
uncover the meanings of number for the company. He constantly looks for discoveries within the
data to offer new insights and vision to craft apt strategies. The insights they provide should pertain
to TQM, Supply Chain, Innovations, Customers’ Profitability, etc.
1.2 Planning - Building Informed Strategies
Management accountants apply their forecasting and budgeting skills to aid senior leaders in
making the most effective business and financial decisions or to develop strategies. Working closely
with executives, CEOs and other leaders Management accountants are essential in defining and
implementing a long-term plan. In essence, management accountant expected to provide the
technical depth of accounting while also providing broad business operations coverage.
1.3 Innovation - Technological Advancement & Breakthrough
In business, infusing technology can do miracles. Being innovative is need of hour and essential for
businesses to sustain or improve its performance. Management Accountant should assume the role
of initiator or change advocate for technological innovation to practice i4.0 (i.e., Industry 4.0) even
now i5.0.
1.4 Leadership - From Planning to Execution
Management accountants being a leader, need to be proficient in decisions-making as well as
making communications in process of crafting plans and ensuring precise execution, usually across
several divisions and departments of a company. He should observe the professional and
business ethics to lead by an example.

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Mind it, being a leader is way different from just being a manager in many ways, such as –
▪ Leaders create a vision, managers create goals; manager don’t.
▪ Leaders are change agents; managers maintain the status quo.
▪ Leaders are unique, managers do copy.
▪ Leaders take risks, managers control risk.
▪ Leaders are in it for the long haul, managers think short-term.
▪ Leaders grow personally, managers rely on existing, proven skills.
▪ Leaders build relationships, managers build systems and processes.
▪ Leaders coach, managers direct.
▪ Leaders create followers, managers have employees (subordinates).
2. Management Accountant - In Role of a Leader, Who Drive the Strategy
Leadership is required to develop an organisational strategy, drive the change and align the
organisation’s structure, resources and culture with the strategy.
In the previous section (especially in point 1.4 i.e. Leadership - From Planning to Execution stated
above on this page) we acknowledge that Management Accountant assume the role of leader, who
need to make or assist in decision making in wake of organisational strategy, make
communications (of strategy, plans, vision and values) while getting such decsions executed either
himself or through others; and remain ethical throughout. Let’s consider each of these three
highligted dimentions of role of management accountant as leader in details.

Communication

Business Decision
Ethics Making

Figure E.2 – Dimentions of role of management accountant as leader

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2.1 Communication
Communication is a two-way process which involves transferring of information or messages from
one person or group to another. Considering the organisation structures and level thereof, it can be
classified as vertical (upward and downward), horizontal, and diagonal.
From perspective of management accountant in strategic context, communication include all formal
and informal exchanges of idea, belief, imagination, emotions, or thoughts. The Management
Accountant, who is considered as agent of change (to align the organisation’s structure, resources,
cost structure and culture with the strategy), while communicating the change and need thereof also
need to communicate the vision and strategy; this will reduce the resistance and process of change
become smooth. The new strategy needs to be communicated with actions as well as words.


Concept Insight
The message in full and then process the message to construe the real intent.
Communication is more than just sending messages
Communication is something more than just sending message, it includes the feedback from
receiver; only then it became dialogue else monologue…Receiving and analysing the feedback is
important because it signifies what is actually conveyed. Importance of this aspect increased in
case of communication done by management accountant in strategic context because feedback
will help to understand the resistance if any and nature thereof.
Listening is more than just hearing
The receiver should listen carefully (both sender and listen try to reduce the noices i.e. barriers of
communication) to receive.
Management accountant apart from report to C-suite used to talk to workers and staffs either in
quality circle meetings, corner meetings or on production floor (some time at shop floor also) to
communicate informally but effectively.
Techniques such as management by wandering/walking around (MBWA)17 are helpful. MBWA
refers to a style of business management which involves managers wandering around, in an
unstructured manner, through the workplace(s), at random (rather than a plan where employees
expect a visit from managers at more systematic, pre-approved or scheduled times), to check with
employees, equipment, or on the status of ongoing work. The expected benefit is that a manager,
by random sampling of events or employee discussions, is more likely to facilitate improvements to
the morale, sense of organizational purpose, productivity and total quality management of the
organization, as compared to remaining in a specific office area and waiting for employees.


17Management consultants Tom Peters and Robert H. Waterman had used the term in their 1982 book In Search of
Excellence: Lessons from America's Best-Run Companies


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Practical Insight
“Management by wandering around" is very similar to the Japanese Gemba walk method
developed at Toyota.
The origin of the MBWA has been traced to executives at the company Hewlett-Packard for
management practices in the 1970s.
In end we need to recognise that technological advancement has changes the mode and style of
communication drastically, in order to have effective communication, management accountant also
need to consider the mode of communication very consciously; the choice shall be based upon the
criteria of intellectual level of receiver, cost budget, availability of time resource and nature of
information (highly sensitive or operational) among others.
2.2 Decision Making
Decision making is the process of making choices by identifying a decision, gathering information,
and assessing alternative resolutions. Decision making process substantially impacted by type of
organisation structure adopted in additions to its size, industry, level of maturity, vision, mission and
goals. The impact may be either positive or negative impact, if the aspects specified in immediate
previous sentence are clearly defined and communicated to stakeholders, then the process of
decision making will be smooth else complicated. Wherein case it is complicated, the need of strong
leader is required who has transformational leadership style.
Decision making is required in every step of the strategy development process. Being part of
strategy development process, management accountant required to either make decisions or assist
C-suite in making decisions. Since decisions taken (or assisted) by management accountant are
deciding factors in organisation’s direction and growth. Hence criteria for making decisions shall
be rational. A decision is said to be rational if it is objective, fully informed, conscious, explicit,
deliberate, consistent (but considering the need of hour or warrant of situations), logical and
aiming for end goals.


Do You Know?
Why business manager or leaders make irrational decisions?
▪ Enthusiasm to quickly get to the end of the analysis process i.e., Jump straight from analysis.
to recommendation without considering any other alternatives.
▪ Not listing to others (& their perspective).
▪ Error in forecasting and determining the affecting factors.
▪ Readily agreeing with the leader’s proposal.
▪ Superficial understanding of facts.
▪ Judgement error or lack of expertise.
▪ Carrying pre-notions - having prior views about the ‘best’ solution.

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Management Accountant has to make decision regarding the benchmark, standards, budgetary
allocations, quality limits and many more in association with others in the organisation hence must
have strong rapport and communication with his counterparts in other department of functional
expertise.
In end, we must acknowledge that leadership style has strong bearing on decisions that
management accountant make and effectiveness thereof.
2.3 Business Ethics
Ethics deals with moral philosophy that involves systematizing, defending, and recommending
concepts of right and wrong behaviour, whereas business ethics is a form of applied ethics or
professional ethics, that examines ethical principles and moral or ethical problems that can arise in
a business environment. It applies to all aspects of business conduct and is relevant to the conduct
of individuals and entire organizations.
Business ethics are closely related to values of organisation; hence ethics should reflect in values.
Undoubtedly relying upon Milton Friedman’s arguments, the classical approach to ethics
suggests that business leaders are responsible for wealth maximisation of fund provider only; but
business has changed its orientation from shareholder to stakeholder. Hence rather leveraging
the classical approach of ethics, the socio-economic approach shall be observed, which suggests
in order to be sustainable every business organisation need to balance the economic motive and
social costs of their actions; because competitive and profit-maximising organisations may well be
efficient in eyes of shareholders or fund providers, but an overriding focus on efficiency and profi t
can lead to ethical issues and dilemmas such as unequal income distribution or damage to the
environment.
Therefore, In determining how the organisation will achieve its goals, leaders establish or shape the
ethics and values that guide the activities of the organisation and set the limits or the extent to which
the ‘means justifies the ends’. Therefore, management accountant while making decisions and
communicating the same, shall observe the business ethics.
To illustrate, for performance evaluation he may use triple bottom line as framework, in lifecycle
cost may consider site cleaning cost at end of project as well as displacement cost incurred to run
the project.

SUMMARY
❑ Traditional Cost Management aims at cost reduction. It revolved around the central theme ‘that
cost cutting always results in enhanced profits’, whereas Strategic Cost Management deals
with measuring and managing costs and aligning them to the business strategy.
❑ Strategic Cost Management is the application of cost management techniques so that they
simultaneously improve the strategic position of a firm and reduce costs.


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❑ Strategic cost management has three important pillars, viz., strategic positioning, cost driver
analysis and value chain analysis.
❑ Value Chain is the sequential chain of activities which leads to delivery of final product to the
customer, it also depicts how value (utility) accumulates to customer. Typically, increasing the
performance of one of the four secondary activities can benefit at least one of the primary
activities.
❑ Value Chain Analysis is a process of categorising the activities into value added and non -value
added activities, with objective of eliminating non-value added activities to obtain cost
leadership and focus (by further resource deployment) on value added activities to improve
product differentiation.
❑ An alternate representative of a value chain is the value shop, which is essentially a problem
resolution model. The primary activities are problem finding and acquisition, problem solving,
choosing among solutions, execution, and control/ evaluation.
❑ Strategic positioning reflects choices a company makes about the kind of value it will create
and how that value will be created differently than rivals. Strategic positioning should translate
into either one of two things: a premium price (i.e., Differentiation) or a lower cost (i.e., Cost
Leadership)
❑ Cost Driver Analysis includes the examination, quantification, and explanation of the monetary
effects of cost drivers associated with an activity.
❑ Companies must search out “white space” in the industry, which usually means competing on
either one of two fronts; a premium price (i.e., Differentiation) or a lower cost (i.e. Cost
Leadership). It’s possible to compete on low cost and be differentiated at the same time —but
companies that try to be all things to all customers can wind up getting stuck in the middle, a
strategic mistake that Michael Porter calls “the kiss of death.”
❑ To command a premium price, a company must deliver distinctive value to customers. To
compete on cost, companies must balance price with acceptable quality and become lowest
cost producer in an industry.
❑ A business model explains how a business works and the economic logic behind it. It is a way
of representing and communicating how an organisation creates values for itself while
delivering products or services for customers.
❑ Alexander Osterwalder proposed a nine element business model canvas wherein four elements
pertaining to cost (key partners, key activities, key resources, and cost structure; on left side
of canvas) are connected to another four elements pertaining to revenue (customer
relationships, channels, customer segments and revenue streams; on right side of canvas)
through ninth element that is value proposition.

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❑ The Value Proposition Canvas has two sides. With the Customer Profile business can have
clear understanding of customer character. With the Value Map business describe how it intend
to create value for that customer. Business achieve Fit between the two when one meets the
other.
❑ Business is said to achieve a problem-solution fit when the features of business’s value
proposition map perfectly match the characteristics of your customer segment profile. When
the market validates this match and business value proposition gets traction with real
customers, business achieved the product-market fit.
❑ External environment comprising the factors that are beyond the control of organisation
(outside organisation boundary) but having influences on organisation, its performance, and
strategic positions. The external environment is then broken down into two categories for
further analysis, called the remote environment and the industry operating environment
including the competitive environment.
❑ An industry is a group of companies that are relatively comparable based on their primary
business activities. There are segments inside the industry. Industry classifications are typically
grouped into larger categories called sectors.
❑ Industry analysis was conventionally performed using the PEST Framework i.e., Political,
Economic, Social and Technology, but this approach has been evolved to reflect dynamics of
the business environment, to PESTEL with add-on of environment and legal issues and now to
STEEPLE with add-on of ethical aspects.
❑ All five competitive forces jointly determine the intensity of industry competition and profitability,
and the strongest force or forces are governing and become crucial from the point of view of
strategy formulation. The five forces enumerated by Porter’s five force model are keep-on
changing, this makes model a dynamic analytical tool.
❑ Market consists of business firm that is selling the product or rendering the services in addition
to buyer who is buying/hiring them. A market segment is a category of cus tomers who have
similar likes and dislikes in an otherwise homogeneous market.
❑ Market segmentation is the process of dividing a broad target customer base or business
market, into small but more defined sub-groups of customers based on some type of shared
characteristics such as demographics, interests, needs, or location. Basis of Segmentation can
be Product, Demographic, Psychographic, Behavioural, and Geographic characteristics.
❑ Basis of competition is that reason why your customer chooses you over you r competitor.
❑ There are certain factors (Called Critical Success Factors) in every industry that are critical to
success of any business organisation in generating and sustaining competitive advantage.
Further with each CSFs, Key Performance Indicators (KPIs) are attached to measure the
performance of business organisation regarding said CSF.


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❑ Core Competences are some of the most important sources of uniqueness: these are the things
that a company can do uniquely well, and that no-one else can copy quickly enough to affect
competition.
❑ Information Technology (IT), Information System (IS) and Information Management (IM), all
three are inter-connected; but not same. Information technology techniques are used as part
of information system to manage information. Organisations develop strategies to ensure
alignment among these three and overall organisational strategy in place.
❑ IT collectively with IS and IM has potential to transform the business around the corners. It has
strong influence on Michael E Porter’s Five Force, Moreover IT/IS has capabilities to revamp
the value chain and empower the organisation to tap the opportunities for creating greater
values.
❑ Management Accountant is a position that holistically addresses the various aspects, which
affect the sustainability of a business's performance. The management accountant is at the
crossroads of technology, financial analysis and strategy, and leadership, helping to identify
what is driving the company's profits and losses, rather than simply reporting th em.
❑ Management Accountant assume the role of leader, who need to make or assist in decision
making in wake of organisational strategy, make communications (of strategy, plans, vision
and values) while getting such decsions executed either himself or through others; and remain
ethical throughout.

TEST YOUR KNOWLEDGE- MCQS

MCQ 1
Mr. Anirban, Chief Management Accountant and advisor to CEO of Avantha Holdings considering
the value proposition canvas as tool to respond to aspects highlighted by customer profile analysis.
You (cost trainee) recently join Avantha Holding, Mr. Anirban asked to appraise the following
statement to pick the correct statement regarding value proposition map
Options
a. Pain relievers and gain creators counter each other’s effects
b. Pain relievers and gain creators are the one and same thing
c. Pain relievers are different from Gain creators
d. Either one of Pain relievers or Gain creator can be part of value proposition map
Key - c
Reason – Pain relievers and gain creators both create value for the customer in different ways. The
difference is that the former specifically addresses pains in the customer profile, while the latter
specifically addresses gains. It is okay if either of them addresses pains and gains at the same time,
The main goal of these two areas is to make the customer value creation of your products and
services explicit.

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MCQ 2
In continuation to previous MCQ
Mr. Nilanjan is hired by Avantha holding as independent consultant for drafting of value proposition
map. He suggests that ranking of customer’s jobs, pains, and gains is essential to respond them.
Mr. Anirban is not convinced with need of rank said three elements of customers’ profile; hence he
seeks your help in evaluating following two statements regarding the customer’s jobs, pains, and
gains.
I. Pains and Gains are controlled by Business.
II. All the pains and gains need not be responded or addressed.
Options
a. Both the statements are correct
b. Both the statements are incorrect
c. Only statement 1 is correct
d. Only statement 2 is correct
Key - d
Reason – Pain relievers and gain creators are distinctly different from pains and gains. Business
have control over the former, whereas it doesn’t have control over the latter. Business decides (i.e.,
design) how it intend to create value by addressing specific jobs, pains, and gains. Business don’t
decide over which jobs, pains, and gains the customer has and no value proposition addresses all
of a customer’s jobs, pains, and gains. The best ones address those that matter most to customers
and do so extremely well.
MCQ 3
The technique of “Management by wandering around" is concerned with which of following
leadership aspects of management accountant.
I. Communication
II. Decisions Making
Options
a. Both of I and II
b. Only with I
c. Only with II
d. None of I and II
Key - b

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Reason – Management by wandering/walking around (MBWA)18 is helpful in making

communications and supporting TQM. MBWA refers to a style of business management which
involves managers wandering around, in an unstructured manner, through the workplace(s), at
random (rather than a plan where employees expect a visit from managers at more systematic, pre -
approved or scheduled times), to check with employees, equipment, or on the status of ongoing
work. The expected benefit is that a manager, by random sampling of events or employee
discussions, is more likely to facilitate improvements to the morale, sense of organizational purpose,
productivity and total quality management of the organization, as compared to remaining in a specific
office area and waiting for employees.
MCQ 4
Technology is dynamic in nature and has significant bearing on activities that create value for
customers. Your organisation is considering introducing RFID, as technological breakthrough. RFID
is capable to revamp which of following primary activities (to generate scope of value);
I. Inbound logistic
II. Outbound logistic
III. Sales and Marketing
IV. After-Sale Services
Options
a. III and IV only
b. II and III only
c. I and III only
d. I and II only
Key - d
Reason – RFID (Radio-frequency identification uses electromagnetic fields to automatically identify
and track tags attached to objects. An RFID system consists of a tiny radio transponder, a radio
receiver and transmitter) can be used to track items in trading concerns throughout the supply chain.
It is calibre to positively influence inbound and outbound logistic.
MCQ 5
A Business model should contain which three components out of those stated below;
I. Customer value proposition
II. Profit formula
III. Impact factor
IV. Key resources and processes


18Management consultants Tom Peters and Robert H. Waterman had used the term in their 1982 book In Search of
Excellence: Lessons from America's Best-Run Companies

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Options
a. I, II and III only
b. I, II and IV only
c. I, III and IV only
d. II, III and IV only
Key - b
Reason – In 2008, Johnson along with Christensen & Kaggerman 19 extended the scope of business
model to what was earlier proposed by Margretta and proposed that a business model also needs a
value proposition, therefore business model should contain three components–
1. Customer value proposition.
2. Profit formula.
3. Key resources and processes.
MCQ 6
Shakti Bearing Ball Trading Limited is considering the proposal to enter into trading of casting iron
as well. Mr. Madhu Sudan, chief strategic enumerate the entry exist barriers of proposed business
line and called a review meeting at request of CEO to consider final advice of C-suite. You (Chief
Cost Advisor) also attended the meeting and suggested that barriers have influence on profitability
(rate as well as nature). Mr. Sudan told SBBTL expected that there will be high entry and exit barriers
you are advised to tell nature and margin rate in context of five force model.
Options
a. Low margin with stable return
b. Low margin with Risky return
c. High margin with stable return
d. High margin with Risky return
Key - d
Reason – Impact of exit and entry barriers on profitability (margin) are depicted below-


19Johnson M, Christensen C & Kaggerman H, 2008, ‘Reinventing your business model’, Harvard Business Review,
December, [Link]/insight/reinventing-your-business-model-form.


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MCQ 7
The board of Modern Furniture Limited considering the need of strategies for Information related
aspects. Chief Information and Technology officer made a statement “Information Technology (IT),
Information System (IS) and Information Management (IM), all three are inter-connected; but not
same. Information technology techniques are used as part of information system to manage
information”. He further highlights the nature of IT/IS/IM strategies and suggests–
I. IT strategy is supply-oriented
II. IS strategy is demand-oriented
III. IM Strategy is dimension-oriented
Which of the above specified statements are incorrect
Options
a. I only
b. III only
c. I and II only
d. I and III only
Key - b
Reason – IM strategy trying to 'put management into IT' by defining the role and structure of the
IT activities in the organisation. It is concerned with the management controls for IT, management
responsibilities, performance measurement and management processes. Here it is decided who can
assess the data and who can’t. It formulated at organisation wide level. It deals with control over the
layout of IT uses in organisation. Hence IM strategy is relationship oriented.
MCQ 8
Ali Fabrics Limited (AFL) has recently decided to invest in an Electronic Data Interchange system
that will enable the AFL to automatically place orders with its major suppliers. Currently, AFL
purchasing department staff have to place orders using postal mails and telephone to the company’s
suppliers, which is slow and inefficient.
Which activity within AFL’s value chain will the new EDI system improve?
Options
a. Infrastructure
b. Inbound Logistic
c. Procurement
d. Outbound Logistic
Key - c
Reason – The EDI system will improve the system for sourcing and purchasing materials. This is
procurement. Note that inbound logistics refers to inventory management - not the purchasing of
inventory itself.

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MCQ 9
Management Accountant assume the role of leader, who need to make or assist in decision making
in wake of organisational strategy, make communications (of strategy, plans, vision and values)
while getting such decsions executed either himself or through others; and remain ethical
throughout. Which of the following statements are incorrect?
I. An increasing number of organizations are segregating management accountants in separate
managerial-accounting departments.
II. Management accountants often are part of cross-functional teams.
III. Management accountants make significant business decisions and resolve operating problems
while support in strategic decision making.
IV. The role of management accountants has changed considerably over the past decade .
Options
a. Only I
b. Only III
c. Both I and III
d. Both I and II
Key - a
Reason – Management Accountant is a position that holistically addresses the various aspects,
which affect the sustainability of a business's performance. The management accountant is at the
crossroads of technology, financial analysis and strategy, and leadership, helping to identify what is
driving the company's profits and losses, rather than simply reporting them.
MCQ 10
Tara Fabrics considering the decisions regarding segmentation. Management Accountant raised
and said it was acknowledged that managerial discretion and judgment determine which markets
are selected and targeted and which others are ignored. In order for market segmentation to be
effective, all segments must be –
Options
a. Distinct, Artistic, Measurable and Profitable.
b. Distinct, Accessible, Measurable and Popular.
c. Desperate, Accessible, Many, and Profitable.
d. Distinct, Accessible, Measurable and Profitable.
Key - d
Reason – In order to be recognised as segment, the following criteria shall be satisfied the segment
should be homogeneous internally, heterogeneous externally (distinct), identifiable (measurable),
shall be reasonable if not substantial (profitable), and must be responsive (accessible).

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TEST YOUR KNOWLEDGE- CASELET BASED MCQS

Case-let on Strategic Fit - Value Propositions of Tesla
In electronic-vehicle segment (four-wheelers), there are many players, who are trying to meet
different requirements of their customers including personal mobility, regular long-distance trips, and
be different from others with their offerings but Tesla is leading the chart.
Tesla, Inc. is an American multinational automotive and clean energy company headquartered in
Austin, Texas. Tesla designs and manufactures electric vehicles, battery energy storage from home
to grid-scale, solar panels and solar roof tiles, and related products and services.
In 2008, Tesla released its first electric car, the Roadster. The Roadster was the first highway legal
serial production all-electric car to use lithium-ion battery cells, and the first production all-electric
car to travel more than 320 km (200 miles) per charge. Tesla aims to create more affordable electric
car options to attract a broader customer base. Tesla expanded its geographic footprint, with
production facilities in China and the U.S, as well as 438 stores and 100 service centres in various
countries.
The Mitsubishi i-MiEV was launched in Japan for fleet customers in July 2009, and for individual
customers in April 2010, while The Nissan Leaf, introduced in Japan and the United States in
December 2010. But tesla counter them strongly with the Model S, released in the U.S. on 22 June
2012 and the first delivery to a retail customer in Europe took place on 7 August 2013, while
deliveries in China began on 22 April 2014. The next model was the Tesla Model X launched in
2015. Then Tesla 3 was launched in mid-2017. The Tesla Model 3 surpassed the Nissan Leaf in
early 2020 to become the world's best-selling electric car ever, with more than 5,00,000 total units
sold by March 2020. However, the Tesla Model Y is the bestselling electric vehicle in terms of yearly
units. Tesla also became the first auto manufacturer to produce 1 million electric cars in March 2020.
Global sales of the Model 3 passed the 1 million milestone in June 2021, the first electric car model
to do so.
While the Nissan Leaf achieved the milestone of 5,00,000 units sold globally in early December
2020, 10 years after its inception.
China is larger consumer of e-vehicles with total of 78,42,668 light-duty plug-in electric vehicle on
road at end of 2021 and nearly 15% of new vehicle sold during 2021 were electric ve hicle there.
There is a clear division between the opinions of industry experts. Larger chunk of experts feels a
strategic fit between value map and customer profile is the reason of superior performance by Tesla,
while some other feels first mover advantage is the reason.
You after qualify chartered accountancy, recently join a consulting firm that has undertaken the task
to study the value proposition of Tesla. Team of consultants, list the pains, gains, pain relievers and
gain creators. List was then given to computer operator for digitisation and circulation among all
consultants, who are working on this. But operator jumbled the list as–

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1. Growing network of charging points

2. Brand recognition
3. Slow charging
4. 8 years battery warranty
5. Durable battery lifetime
6. Insufficient number of charging points
7. Reputable brand
8. Developed interior ergonomics
9. Self-driving option
10. Lack of luggage space
11. Interior ergonomics
12. 75 minutes to charge 100% with supercharging stations
Requirements
MCQ 1
Which of following is correct combination of Pains?
Options
a. Item No. 3, 6 and 10
b. Item No. 3, 5 and 10
c. Item No. 3, 5 and 11
d. Item No. 2, 5 and 11
Key – a i.e., Item No. 3, 6 and 10
Reason – Refer answer to first descriptive question of this case-let
MCQ 2
Which of following is correct combination of Gains?
a. Item No. 3, 6 and 10
b. Item No. 2, 5 and 11
c. Item No. 3, 5 and 11
d. Item No. 3, 5 and 10
Key – b i.e., Item No. 2, 5 and 11
Reason – Refer answer to first descriptive question of this case-let

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MCQ 3
Which of following is correct combination of Pain Relievers?
a. Item No. 1, 7 and 9
b. Item No. 4, 7 and 9
c. Item No. 1, 8 and 12
d. Item No. 4, 8 and 12
Key – c i.e., Item No. 1, 8 and 12
Reason – Refer answer to first descriptive question of this case-let
MCQ 4
Which of following is correct combination of Gain Creators?
a. Item No. 1, 7 and 9
b. Item No. 4, 7 and 9
c. Item No. 1, 8 and 12
d. Item No. 4, 8 and 12
Key – b i.e., Item No. 4, 7 and 9
Reason – Refer answer to first descriptive question of this case-let
Descriptive Question 1
Do you agree to the opinion of larger chunk of industry experts or not? Justify you answer.
Answer - The opinion of larger chunk of industry expert is correct considering value proposition
canvas.
Value Proposition describes the benefits that customers can expect from product and the bundle of
products and services that business offer to specific customer segment to create value. Therefore,
value proposition canvas 20 is the tool that will help the organisation to design, test, build and
manage the great customer value propositions.
The Value Proposition Canvas has two sides. With the Customer Profile business can have clear
understanding of customer character. With the Value Map business describe how it intend to create
value for that customer. Business achieve Fit between the two when one meets the other.


20By Alexander Osterwalder, Yves Pigneur, Gregory Bernarda, Alan Smith in Value Proposition Design - How to Create
Products and Services Customers Want (2014)

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Value Proposition Canvas

Value Proposition Canvas of Tesla

Value Map Customer Profile

Products & services Customer Jobs

Model S Personal mobility
Model X Regular long-distance trips
Model 3 Be different from others

Pain relievers
Pains
Growing network of charging points
Insufficient number of charging points
Developed interior ergonomics FIT
Lack of luggage space
75 minutes to charge 100% with
Slow charging
supercharging stations

Gain creators Gains

8 years battery warranty Durable battery lifetime
Reputable brand Brand recognition
Self-driving option Interior ergonomics

Business is said to achieve a problem-solution fit, when the features of business’s value
proposition map perfectly match the characteristics of your customer segment profile. When the
market validates this match and business value proposition gets traction with real customers,
business achieved the product-market fit.
The value proposition canvas drawn above shows fit (problem-solution as well as product-market)
exist, hence options of larger chunk of expert is factually correct.

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Descriptive Question 2
How establishing manufacturing in China help Tesla to do better in primary activities of their
value chain?
Answer – Primary activities of value chain consist of the inbound logistics, operations, outbound
logistics, marketing & sale, and after sale services. Automobile industry use assemblies, which are
usually procured from countries with low cost model (because such countries are capable to produce
these assemblies cheaply, substantially due to cheap labour rates). Tesla is not an exception to this.
China (and nearby counties to it) is one such country. Therefore, by establishing their operations in
China tesla is able to reduce inbound cost, also reduce the cost of operation due to cheap labour
rate.
Moreover, China is largest market for E-Vehicle (Over 2.7 million BEVs were sold in China in 2021,
accounting for 82% of new electric car sales. Electric cars accounted for 16% of
domestic car sales in 2021, [Link] This not only reduce outbound logistic cost as well
as easy and large market hence marketing and sale also become easy; further the fact China is
growing market create a great source of value.
Hence, establishing operation in China is beneficial to Tesla in generating same or higher value
(perceived value by customer) for its customer at lower cost level (than earlier); therefore, increasing
margin.
Note – Alternate answers are possible to this particular descriptive question.

ANNEXURE 1
Based upon two distinct nature of supporting cost (overhead cost), drivers can also be
categories into two classes
1. Resource drivers – Concerned with contribution of specific quantum of resources, which
caused cost → electricity costs to produce products and the number of machine hours spent
(machine hour is resource).
2. Activity driver – Concerned with cost incurred on the activities required to complete a specific
task → inspection costs and the number of inspections or the hours of inspection (Inspection
is required activity to ensure quality).
Supporting Cost

Resource Drivers Activities Drivers

Organisational Activities & Drivers Operational Activities & Drivers

Structural Activites & Drivers

Executional Activities & Drivers

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2.1 Organizational activities and cost drivers

2.1.1 Structural cost drivers relate to business strategic choices about an organization’s underlying
economic structure, such as scale and scope of operations, use of technology and complexity of
products.
▪ Scale – What are the investment amounts for research and development, product design,
production and other operations?
▪ Scope – What is the area of operation, front-line or back-end?
▪ Experience – How many years has the company already operated this?
▪ Technology – What technical processes are involved in each process of the company's value
chain?
▪ Complexity – How sophisticated are the products or services to provide to customers?
Note – Not necessary that more is better.
2.1.2 Executional cost drivers relate to the execution of the business activities, such as utilization
of employees, provision of quality service, and product design and manufacturing.
▪ Workforce involvement – Do the employees take part in decision-making and performance
improvements?
▪ Total quality management – Are the managers and employees devoted to total quality in
processes and products?
▪ Capacity utilization - What are the operational scales for matching utilization of plant capacity?
▪ Plant layout efficiency – How efficient is the production plant's layout?
▪ Product configuration – Is the product design or service formulation effective?
▪ Linkage with suppliers and customers – Is the linkage with vendors and customers based on
the company's value chain?
Examples
Structural activities Structural cost drivers
Plant construction Number of plants, scale, degree of work centralization
Employee grouping Number and type of work units
Complexity Number of product lines, number of unique processes,
number of unique parts, degree of complexity
Process selection and use Types of process, experience of usage
Executional activities Executional cost drivers
Employee utilization Degree of involvement
Quality service provision Quality management approach
Operation of plant layout Plant layout efficiency
Product design & manufacturing Product configuration

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2.2 Operational activities and cost drivers

Operational activities are daily work activities done as a result of the structure and process adopted
by the company. Operational cost drivers refer to factors that drive the costs of operational activities.
Can be categories at Unit, Batch and Product level.
Examples

Unit-level activities Unit-level cost drivers

Grinding materials Grinding machine hours
Component assembly Labour assembly hours
Drilling holes Drilling machine hours
Materials use Material weight
Electricity use (Power) Number of kilowatt-hours
Batch-level activities Batch-level cost drivers
Equipment set up Number of setups
Finished products moved in batch Number of moves
Manufacturing products inspected in batches Inspection hours
Reworking products Number of detective units
Product-level activities Product-level cost drivers
Product design and/or redesign Number of change orders
Product line scheduling Number of different products
Product testing Number of procedures

ANNEXURE 2
List of Porter’s Five Forces factors
Threat of new entrants
▪ Economies of scale
▪ Product differentiation
▪ Brand identity/loyalty
▪ Access to distribution channels
▪ Capital requirements
▪ Access to latest technology
▪ Access to necessary inputs

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▪ Absolute cost advantages

▪ Experience and learning effects
▪ Government policies
▪ Switching costs
▪ Expected retaliation from existing players
Bargaining power of suppliers
▪ Number of suppliers
▪ Size of suppliers
▪ Supplier concentration
▪ Availability of substitutes for the supplier’s products
▪ Uniqueness of supplier’s products or services (differentiation)
▪ Switching cost for supplier’s products
▪ Supplier’s threat of forward integration
▪ Industry threat of backward integration
▪ Supplier’s contribution to quality or service of the industry products
▪ Total industry cost contributed by suppliers
▪ Importance of the industry to supplier’s profit
Bargaining power of buyers
▪ Buyer volume (number of customers)
▪ Size of each buyer’s order
▪ Buyer concentration
▪ Buyer’s ability to substitute
▪ Buyer’s switching costs
▪ Buyer’s information availability
▪ Buyer’s threat of backward integration
▪ Industry threat of forward integration
▪ Price sensitivity
Threat of substitute products or services
▪ Number of substitute products available
▪ Buyer’s propensity to substitute
▪ Relative price performance of substitutes
▪ Perceived level of product differentiation


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▪ Switching costs
▪ Substitute producer’s profitability & aggressiveness
Rivalry among existing competitors
▪ Number of competitors
▪ Diversity of competitors
▪ Industry concentration and balance
▪ Industry growth
▪ Industry life cycle
▪ Quality differences
▪ Product differentiation
▪ Brand identity/loyalty
▪ Switching costs
▪ Intermittent overcapacity
▪ Informational complexity
▪ Barriers to exit


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