For Dennis Wright
Professor Ranfeng Qiu， copy right protected
Relative Cost Analysis on Automobile Industry
Cost-leadership strategy is difficult to employ. It helps the business achieve competitive advantage by lowering operation costs, and maintaining good quality simultaneously.
Relative cost analysis help identify the “secret” of low cost leaders, and is critical for businesses pursuing this strategy.
This analysis includes two stages:
identify the key cost driver (s) in each value chain activity.
identify the linkages across different stages in the value chain.
Key points for relative cost analysis include:
Focus on differences in individual activities, not just differences in total cost.
A subset of all of a firm’s activities
Thicker costs deserve deeper treatment in terms of cost drivers.
Driver should vary across competitors.
Cost analysis should not crowd out consideration of WtP.
1
Segmented markets – more profitable position
Undifferentiated market – price-based competition
Professor Ranfeng Qiu， copy right protected
Stage 1. Identify the principle activities and allocate the total cost
Relative Cost Analysis on Automobile Industry
Purchasing parts
Parts
Inventory
R&D
Design
Components production
Assembly
Testing
Quality
Control
Prod.
Inventory
Sales
Mrkt
Distribution
Dealer
After-
sales
2
Segmented markets – more profitable position
Undifferentiated market – price-based competition
Professor Ranfeng Qiu， copy right protected
| Purchasing parts | Parts inventory | R&D Design | Components production. | Assembly | Testing Quality control | Products inventory | Sales & mrkt | Distribution | Dealer & after sales |
Relative Cost Analysis on Automobile Industry
Based on the firm value chain provided in Slide 2:
Please identify the key cost driver (s) in each value chain activity.
** You don’t need to write on these slides, you may answer these questions in a separate Word file, listing and describing all cost factors
3
Professor Ranfeng Qiu， copy right protected
| Purchasing parts | Parts inventory | R&D Design | Components production | Assembly | Testing Quality control | Products inventory | Sales & mrkt | Distribution | Dealer & after sales |
Relative Cost Analysis on Automobile Industry
2. Then please identify the linkages across different stages in the value chain.
(please note that I only give examples of some linkages, your team needs to continue this, identifying as many linkages as you could find)
Consolidation of orders to increase discounts, increase inventory
4
Relative cost analysis
1) Focus on differences in individual activities, not just differences in total cost.
2) A subset of all of a firm’s activities
3) a thicker costs deserve deeper treatment in terms of cost drivers.
4) driver should vary across competitors.
5) cost analysis should not crowd out consideration of WtP.