Challenges:
- Some costs may be difficult to separately track for each major product line. For example, marketing costs often relate to advertising campaigns for a company’s products as a whole rather than for individual products (e.g., BMW advertisements are often for the brand rather than a specific model).
- The timing of some value chain costs will occur in different periods than the related product revenues. For example, research and development costs will be incurred before a product is brought to market and customer service costs will be incurred after the product has been sold. Therefore to accurately assess product profitability using value chain analysis, managers will have to conduct the analysis on a long-term basis over multiple reporting periods (years) to fully match revenues with the related costs.
Problem 1-9 (continued)
- Could lead managers to reduce costs in certain areas such as customer support that could improve product profitability in the short-run but would have negative consequences longer-term if product quality or customer service levels suffer as a result. Note, a good control system would mitigate this behavior by rewarding managers in part based on the longer-term performance of the company.
- Longer term success depends on having a constant supply of new products to fill the lost sales that eventually occur as older products lose their appeal with consumers. However, analysis will often show that older products are relatively more profitable. Long term success, however, depends on having products at all stages of the product life cycle and therefore care must be taken with decision making based on value chain analysis alone.
2. Change in value chain costs over the life of a product:
- Research and development costs are primarily incurred before a product is brought to market and so will be low or non-existent for more mature products.
- Product design costs will be considerably lower as a product matures but some may continue to be incurred such as design changes aimed at improving quality or functionality.
- Manufacturing costs may decline on a per unit basis for more mature products as a result of improvements to production activities or because higher volumes are produced allowing for greater economies of scale (e.g., lower unit costs for raw materials).
- Marketing costs will likely be higher for new products but decrease as products mature since customers will be aware of their existence and features. Marketing costs could also increase as a product matures in response to increased competition.
- Distribution costs may increase as a product matures as managers seek new markets in which to increase sales.