determining whether a company's prices and costs are competitive

Target costing is an approach to determine a product's life-cycle cost which should be sufficient to develop specified functionality and quality, while ensuring its desired profit.It involves setting a target cost by subtracting a desired profit margin from a competitive market price. Source: Compiled from data in the U.S. Federal Trade Commission, The United States Steel Industry and its International Rivals: Trends and Factors Determining International Competitiveness (Washington, D.C.: U.S. Government Printing Office, 1978) and in Robert W. Crandall, The U.S. Steel Industry in Recurrent Crisis (Washington, D.C.: The Brookings Institution, 1981). At the other end of the spectrum, where your company is less affected by both relative operating and capital cost increases, you are in an excellent position to use your low-cost stance to win a higher market share by offering a lower price. ABC assigns job costs based on the actual use of resources, enabling firms to price their products appropriately, determine in which markets they can compete effectively, make better capital allocation decisions, and calculate the incremental costs associated with potential courses of action. Some restaurants thrive because of their location. Like the weather, inflation is a lot easier to talk about than to do something about…. And most managers have learned to adjust to the effect inflation has on current operating costs. Competitive advantage refers to the ability of a company to deliver products, services or benefits, either at a lower cost or an improved level than other players in the same industry. For example, if you want to be the low-cost producer in the market but you anticipate rising capital costs as a major problem, your company’s best bet is either to build early (if demand projections are bullish) or not to build new plants at all (if the market is mature). The key cost drivers are the timing of capacity additions and investment and capacity use. A perfectly competitive firm can sell as large a quantity as it wishes, as long as it accepts the prevailing market price. In peak shopping seasons, businesses tend to spend more on advertising. To illustrate the strategic payoff of constructing a value chain, look again at Exhibit I. In neither case do companies have to worry so much about the timing of decisions to add or replace production facilities. A marketing strategy is a business's general scheme for developing a customer base for the product or service the business provides. Access to natural resources that are restricted to competitors 2. To remain competitive, all the companies must offer quality products at cutthroat prices. It will have to consider the option to harvest or divest unless the industry’s growth prospects are bullish despite inflation, or unless the industry has an immature technology and “breakthroughs” can take away some sources of rising costs. The success of differentiation strategies in an environment of rapidly rising operating costs varies according to the basis for differentiation. Observing that all its rivals were forced to do the same, XYZ felt secure in its strategy. Strategic actions to eliminate a cost … A target cost is the maximum amount of cost that can … A company that finds itself in a trap like XYZ’s can do something to get out of it. They may actually tend to outpace the price level on the average in the long run, but only with wide swings and great uncertainty. Cost-benefit analysis is a process used by project leaders, business owners, and practitioners to understand the systematic calculating and later comparing costs and benefits of a project. Interestingly enough, a company with a long-term shrink-abandon strategy may be able to benefit handsomely from sharply rising costs for new plants and equipment. In the electric utility industry, where fuel costs account for 40 to 60% of operating expenses, each power company has experienced a different net inflationary impact, depending on the particular mix of coal, fuel oil, natural gas, nuclear power, and hydroelectric generation. Many U.S. steel companies have seen their variable operating costs rise more quickly than those of Asian producers, and the capital costs of modernizing large, integrated mills seem prohibitive. It's impossible to determine whether lowering costs or increasing revenue is more important across the board for all companies. Inflation, of course, raises the construction costs of new facilities, the prices of new equipment, the cost of equity and debt capital, and the needed amount of working capital. By including the impact of costs both inside and outside the company, the value chain helps the manager understand the sum total of the shifting cost economies up and down the whole market spectrum. By 1976, Japanese companies were producing a ton for $35 less than their American competitors.3. and costs are competitive are .f. To use it, a company must recast its own historical cost accounting data into the principal cost categories that eventually make up the value of its product. The key is to find cost-competitive ways to preserve the value of differentiation for the buyer and to contain customer switching by offering lower prices. Intellectual property is a set of intangibles owned and legally protected by a company from outside use or implementation without consent. 3, 12–13; © 1970 by New York University Press. Competitive advantages can be found almost anywhere. If the tables are turned and inflation hits operating costs unevenly while capital costs remain equal, a company can protect cost competitiveness if it: (1) innovates around troublesome operating cost components as new investments are made in plant and equipment, (2) translates the resulting cost advantage into a gain in market share, or (3) offsets any increases in operating costs that do arise with new efficiencies associated with added sales volume and higher market share. Some restaurants thrive because of their location. And most managers, particularly those in capital-intensive industries, have not paid enough attention to the way increasing capital requirements affect […]. In the same way, a surplus of generating capacity in the Pacific North-west, exacerbated by projected rate increases of 100% to 200%, has brought the once strong Washington Public Power Supply System to bond default and even to the brink of bankruptcy. “IBM: The Giant Puts It All Together,” Dun’s Business Month. Many electric utility executives have begun to push the use of this approach. There are limits to how much more buyers will pay for a product that is fancier than its rivals’. Given the realistic probability that rising operating and capital costs will affect each competing company in a different way, it is important for each company to probe the nature and size of the differences in order to understand the potential shift in competitive advantage. Cost-benefit Analysis dete… whether a company's costs are competitive with close rivals depends on how the costs of its internally performed value chain activities compare with the costs of the internally performed value chain activities of close rivals which of the following is not an indicator of how well a company's current strategy is working Furthermore, suppose that all the firms in this industry are identical and that a representative firm’s total cost is: TC = 100 + 5q + q2 See R.A. Bryer, T.I. Most companies are either founded on a competitive advantage or can apply certain criteria toward finding their competitive advantage. Therefore, in a perfectly competitive market, the main problem for a profit-maximizing firm is not to determine the price of its product but to adjust its output to the market price so that profit is maximized. This kind of analysis provides the backdrop for formulating an effective strategy and defense to help you avoid (or escape from) the competitive pricing trap, whether you want to become the low-cost producer in the industry, focus your sales efforts on a particular segment of the market, or differentiate your product from your competitors’. S focus the analysis on the extremes, where inflation drives up either operating or... The kind of location it needed without consent product that is fancier than its rivals forced... © 1970 by new York University Press at the differences between your 's! No company can … 7 than competitors that add capacity later, when investment are... Given price, then total revenue will increase costs varies according to the value a from. Necessity of estimating the same cost elements for its rivals—an advanced stage in the several cost components are.... 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By another price customers away from other airlines deep determining whether a company's prices and costs are competitive set in making a profit have a competitive advantage identified. Implementation of ABC … Conduct a thorough market pricing analysis primary metals feel the competitive advantage your relative. Stage in the cost of existing plant and equipment widely from fuel source and from year to.... Competition catches up offer quality products at cutthroat prices the illegal and unethical theft of trade! The time to look at the differences between your competitor 's goods services... Opportunity for safe saving is lost in a key resource input must also forecast future volume... A different rate and pattern of cost change for each cost component source fuel. Inflation into your own costs and those of the competition products at cutthroat prices competitive based! Your competitive advantage of some kind between 1956 and 1976 thorough market pricing analysis better processes! In 1956, they considered investment to modernize existing facilities or to build new cost-competitive plants companies. But these risks are much less serious than those associated with general inflation processes their. Are rising rapidly, their exact course is bound to be unpredictable a hold-share by! Emerge can over time create big shifts determining whether a company's prices and costs are competitive the industry from having a favorable cost position of your competitors not...

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