Week 3

Scenario Analysis

"what if" analysis; describes the estimated outcome if a certain situation were to take place

Maturity (Life Cycle)

- Industry has established its demand ceiling and can continue to service that demand - Investment is low risk and generally provides predictable and steady returns - Profits for some products may increase during maturity - Best practices become more stable and entrenched *Growth slows; market is well established; cost controlling efforts; reduced risk of new entrants due to EOS*

Growth (Life Cycle)

- Industry has established that there is a need or demand - More organizations attracted to market - Investment is medium risk with potential returns still strong - Speed of growth and demand ceiling unknown *consumers are aware of product; demand increases; fewer companies competing; resources still focused on R&D and marketing, but with increasing sales*

Introduction (Life Cycle)

- Industry is in inception phase - Developing around a new product, service, technology, process or business model - Few organizations in the industry - Unproven strategies - High-risk - Possibility for high returns *focus is on creating awareness and demand; expenses are high (R&D investments) and profits are low or non-existent; highly fragmented market*

Decline (Life Cycle)

- Industry undergoes consolidation; competitors may leave market - Sales drop off and demand fades out - Industry transforms significantly *Slow and prolonged; demand diminishes and revenues decline; exit strategies or businesses may adapt and pivot; biggest risk is that senior decision makers will incorrectly believe that a successful business will weather any storm*

Strategies to Extend Maturity Phase

- increasing product demand within existing customer base with special offers - encouraging trial versions to introduce new customers - enhancing current product features or usability to make product more attractive -offering special incentives and promotions to attract customers who use other brands

Benefits of Environmental Costing

- informed SH - integrated business and environmental planning - improved product and process design - guidance in selection of value chain partners - heightened awareness of need to protect the environment - guidance in budget planning and resource management

Risk Management Process

1. Identification 2. Risk Assessment 3. Risk Response 4. Internal Control Activities 5. Information and Communication 6. Monitoring

PESTEL

A form of analysis that is used to assess external factors Political: Factors imposed by governments at various levels and include considerations such as political stability; policies governing health and education and infrastructure; the priorities of the government in power Economic: Factors include economic growth, monetary policy, inflation, interest rates, exchange rates Societal: Factors include the characteristics of the relevant population: demographics, work ethic, health consciousness, immigration/emigration, infant mortality, life expectancy, culture, religion and diversity Technological: Factors include level of automation, research and development support, infrastructure, technology incentives, rates of technology adoption and technology transfer Environmental: Factors include influences of the natural environment, including climate, weather and the quality of air, water and soil Legal: Factors include considerations such as environmental law, health and safety, human rights, consumer protection, taxation, employment law, anti-trust law and IP and patent law

SWOT

A form of analysis used to evaluate the internal strengths and weaknesses of an organization as well as the external threats and opportunities Strengthes Weaknesses Opportunities Threats

Cost-Based Pricing

A form of pricing where setting prices is based on a function of cost (e.g., 30% markup on cost)

Threat of New Entrants (PFF)

A measure of the degree to which barriers to entry make it easy or difficult for new companies to get started in an industry - High when barriers to entry are low - Low when barriers to entry are high Factors: - Government Policy (tariffs, duties, regulations) - Availability of Economies of Scale - Level of Customer Loyalty - Patents Held by Existing Firms - Level of Expected Retaliation - Initial Investment Required

Bargaining Power of Suppliers (PFF)

A measure of the influence that suppliers of parts, materials, and services to firms in an industry have on the prices of these inputs Factors: - Cost of switching to a new supplier - Degree of differentiation between products available from different suppliers - Impact of inputs from supplier on the firm's own costs or ability to differentiate its product - Presence of substitute inputs - Strength of distribution channel - Quality of available suppliers

Balanced Scorecard

A measure/incentive of management performance; meant to go beyond traditional objectives and measures of organizational performance and includes measures such as internal processes, external customers and employee learning and growth

360 Degree Reviews

A measure/incentive of management performance; where an employee is reviewed by peers and management and has had an opportunity to give reviews in return - aggregate data is used to develop employee's review results

Peer Nomination

A measure/incentive of management performance; where employees nominate their fellow peers who exemplify desired objectives

Points Programs

A measure/incentive of management performance; where participants collect points for achieving pre-set metrics and redeem them for rewards

What are the three C's of Pricing?

Costs Customers Competitors

5 Stages of Product Lifecycle

Development Introduction Growth Maturity Decline

Benchmarking

External comparison to other industries and peers

Political (PESTEL)

Factors imposed by governments at various levels and include considerations such as political stability; policies governing health and education and infrastructure; the priorities of the government in power

Legal (PESTEL)

Factors include considerations such as environmental law, health and safety, human rights, consumer protection, taxation, employment law, anti-trust law and IP and patent law

Economic (PESTEL)

Factors include economic growth, monetary policy, inflation, interest rates, exchange rates

Environmental (PESTEL)

Factors include influences of the natural environment, including climate, weather and the quality of air, water and soil

Technological (PESTEL)

Factors include level of automation, research and development support, infrastructure, technology incentives, rates of technology adoption and technology transfer

Societal (PESTEL)

Factors include the characteristics of the relevant population: demographics, work ethic, health consciousness, immigration/emigration, infant mortality, life expectancy, culture, religion and diversity

Variable Product Cost-Based Pricing

Form of pricing where the selling price is created by adding a markup in dollars or % to the VC - suitable for *non-competitive markets* - Focused on recovering relevant costs and *ensures a positive CM* - Not a good fit when FC are a large component of total costs

Contingency Planning

Formal planning process for understanding and mitigating events/risks - associated with fires, natural disasters, terror acts, bankruptcy, lack of supply, etc.

Rivalry (PFF)

One of Porter's five forces - high when competition is fierce in a market and low when competitors are more complacent Factors: - Degree of concentration of power - Sustained competitive advantage through innovation - Competition between online and offline companies - Level of marketing, advertising and promotions expenditure - Existence of price wars

Relevant Costs - ST

Relevant costs are those that differ between alternatives (typically only VC)

Relevant Costs - LT

Relevant costs include FC because you can make adjustments and solve problems; analysis shifts and quantitative tools such as capital budgeting can be used

Transferring (Risk Response)

Risk response where the company accepts the risk, but does not bear the entire risk on its own - the organization will transfer or share the risk with other parties - techniques include purchasing insurance products, pooling risks, engaging in hedging transactions, or outsourcing an activity.

Avoidance (Risk Response)

Risk response where the company doesn't take on the risk and forfeits the potential benefits - good strategy when the benefits are small or infrequent, given the potential risks and costs.

Acceptance (Risk Response)

Risk response where the company takes on the risk and accepts the potential consequences, as the company has evaluated that the potential benefits outweigh the costs.

Reduction (Risk Response)

Risk response where the company takes the risk, but tries to reduce the total exposure to the risk - done by introducing controls or processes.

Sensitivity Models

Surveying the results of a number of variables to study uncertainty

Bargaining Power of Consumers (PFF)

The ability of customers to influence the price that they will pay for the firm's products or services - Ability to do this depends on their power to bargain with the seller Factors: - Volume and concentration of potential buyers - Volume of goods or services purchased - Contractual lock-in - Dependence on established channels of distribution - Availability of information to buyers - Price sensitivity of buyer - Customer value analysis - Product liquidity

Threat of Substitutes (PFF)

The availability of substitute products and services - Substitute products and services are a broader set of goods than simply similar products or services Factors: - Customers' propensity to substitute - Relative price and availability of substitute - Cost to buyer of switching products - Perceived level of differentiation of substitute products - Number of substitute products available - Ease of substitution

Social Capital

The non-financial measure by which a company's reputation may add to its ability to accomplish its objectives - takes many forms - no standard unit of measure

Strategic Risk

The risk associated with ineffective strategic decisions, improper application of decisions made by management, or lack of responsiveness by management to the changing business - also linked to a company's mission and objectives

Reporting Risk

The risk associated with misleading or inaccurate information being reported

Operational Risk

The risk resulting from ineffective operations, failed practices, large swings in the rate of returns, and inadequate allocation of resources (capital and human)

Compliance Risk

The risk resulting from the failure to comply with current or changing laws and regulations

Shape of the Life-Cycle Curve

The shape of this curve is influenced by many factors including the nature and timing of product enhancements, introduction of new technology, pricing, degree of segmentation and choice of distribution channels

Environmental Audits

These may be used by the organization as a formal evaluation tool to assess the environmental performance, consists of 5 elements: 1. Environmental Policy 2. Environmental Objectives 3. Environmental Control System 4. Environmental Risk Assessment 5. Environmental Compliance

Tender (Contract) Pricing

This form of demand-based pricing involves making an offer, bid or proposal or expressing interest in response to an invitation or request for tender - proposal submitted for job or contract - aims to cover materials, labour costs and generate a profit - often undisclosed and in competitive markets

Price Bundling

This form of demand-based pricing involves offering several products or services for sale as one combined product - offered when customers purchase more than one product or service from a company - more you buy, the less you pay - package deals

Peak Load Pricing

This form of demand-based pricing involves the practice of charging a higher price for the same product or service when demand approaches physical capacity limits - tries to reduce demand to compensate for limited supply - e.g., UBER surge pricing

Loss Leader Pricing

This form of demand-based pricing is when a product is sold at a price below its market costs to stimulate the sale of other more profitable goods and services - e.g., Ecotemp at Ecolab - products sold below market price - customer draw to stimulate sales of more profitable, repeat purchase goods

Full Absorption Cost-Based Pricing

This form of pricing addresses the issue with variable costing by including FC - Organizations can use the forecasts to ensure that all of its product costs are being recovered with the price set Advantage: easy to use because all costs are captured without the need to split them between FC and VC Disadvantage: based on budgets, which could be inaccurate; also ignores competition

Life Cycle Cost-Based Pricing

This form of pricing assesses price based on what stage of the life cycle the product is in A pricing decision based on this form of pricing must factor in that 80-90% of the product's costs are incurred during the pre-production stages (development and introduction) Objective: *to maximize profits over a product's entire life cycle rather than to maximize revenues and minimize costs for each stage*

Demand-Based Pricing

This form of pricing focuses on two things: value to customer and demand (competition) - elastic demand curve means that customer is more price sensitive - inelastic demand curve means that customer is not price sensitive - monopoly and oligopoly forms of markets allow suppliers to freely set price and an inelastic demand curve is found in these markets

Value-Based Pricing

This form of pricing involves the practice of setting prices based on a trade-off between the perceived value to the customer and the producer's incentive to produce the product - uses value curves, which rank the attributes of the focal firm's CVP v. its main rivals to see which firm offers the most value for the price charged - focuses on single market segment - compares based on next best alternative - focuses on differentiated features, not the brand

Target-Price-Based Costing

This form of pricing starts with a price and works backwards to target cost that is to be achieved through production; requires an understanding of customers' perceived values; intimate understanding of customers

Environmental Accounting

This includes key environmental information in the information systems of the organization - involves setting goals, formulating policies and assessing and reviewing the performance as it relates to the environment - includes a means of assessing the organization's current environmental performance and finding opportunities for improvement

Predatory Pricing

This is a form of demand-based pricing where a company deliberately prices below its costs to drive out competitors and restrict supply - organization will incur ST losses in exchange for LT profits - deliberate price cutting or offers of "free gifts/products" - forces smaller/weaker rivals out of business and prevents new entrants - works in ST but not LT - anti-competitive and illegal if proven, but difficult to prove

Penetration Pricing

This is a form of demand-based pricing where the company will set the price of a good or service low in order to attract customers and gain market share; price is raised later on once the market share is secured - price set low to penetrate market - low price to secure high volumes - intent is to lower costs over the LT by gaining production and distribution economies of scale - suitable for products with a long product life - may be useful if launching into new market

Price Skimming

This is a form of demand-based pricing where the goods are sold at higher prices initially so that fewer units are required to break-even - over time, price is lowered and audience that the product is available to is widened - high price, limited volume - used to target "early adopters" - short window of opportunity - suitable for products with short life cycles or high competition

Failure Costs

This is a form of environmental costs; costs incurred when a negative event happens (e.g., contaminated product shipped to customers) MOST EXPENSIVE

Control Costs

This is a form of environmental costs; costs of enforcing control measures (e.g., safety supervisors) SECOND MOST EXPENSIVE

Assessment Costs

This is a form of environmental costs; costs to assess a situation (e.g., testing) SECOND LEAST EXPENSIVE

Prevention Costs

This is a form of environmental costs; costs to prevent a negative event from happening (e.g., regular maintenance) LEAST EXPENSIVE

Porter's Five Forces

This is a model that was developed to identify competitive forces that influence planning strategy Threat of Substitutes Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Consumers Rivalry

CSR

This is a term used to describe the voluntary decisions made by businesses to actively apply high moral and ethical standards above and beyond those required by law *3Ps/Triple Bottom Line: People, Planet, Profit*

Death Spiral

This is an issue with cost-based pricing where the *volume of sales falls* (potentially as a result of high Selling Price, which might be related to competitor's low costs); as sales volume falls, *FC per unit increases leading to higher cost per unit* which leads to *higher SP* if pricing is based on cost, which *drops demand and causes sales to fall even more*

Managerial (Internal)

This is one of the two categories that environmental costs can fall into when performing environmental costing - environmental cost control and management; the correlation of the business and environmental performance and proper resource management

Financial (External)

This is one of the two categories that environmental costs can fall into when performing environmental costing - governed by ASPE/IFRS; includes financial reports to SH where appropriate

Maturity Phase

This is the most important phase in the product life cycle to prolong and lengthen from a financial perspective; this is when the product is in high demand and is highly profitable

Environmental Costing

This is the quantitative portion of the environmental accounting process; involves identification, appropriation and application of environmental costs falling into two main categories: managerial (internal) and financial (external)

Probabilistic Models

Using past data and AI to make predictions about future performance