A thorough analysis will require a good deal more inquiry of management and fact finding than is available from the limited information provided earlier, but a few useful observations can be made. 1. Encourage BBL to consider increasing the effort put into design to reduce manufacturing costs and to reduce the relatively high rate of product returns in the specialty segment. The cost of design appears low relative to manufacturing and downstream costs, especially in the specialty segment. Inquire about which types of design approaches are being used. Urge BBL to adopt concurrent engineering-based methods, especially because of the relatively short sales life cycles in the industry. Kaizen procedures should also be adopted.
2. Consider additional analysis of pricing. Because of BBL’s strong acceptance in the specialty segment and because the differentiation strategy is likely to be important in that segment, a price increase might yield higher profits with little or no loss in market share. Cost leadership appears to be the appropriate strategy in the major retail segment; inquire what methods the company is using to reduce overall product costs in this segment. Also, investigate further the rate of customer returns for each product. Is this due to design problems or problems in sales management?
3. Consider a further analysis of marketing expenses. Would an increase in marketing effort in the major retailer segment improve sales in this segment?
4. Consider the need to perform a detailed analysis by product category within each market segment. A detailed analysis might uncover important information about opportunities to reduce cost and add value within the products’ value chain.
5. Because of the relatively short sales life cycles, consider whether target costing could be used effectively at BBL. How intense is the level of competition in the industry, and to what extent are trade-offs made between functionality and price in the development and introduction of each new product? If the level of competition is very intense, and if trade-offs between functionality and price are key strategic decisions, target costing should be a useful management tool.
6. Investigate the costing system. Is it activity-based? How accurate are the cost figures that it develops?