Theory of Constraints (TOC) and Activity Based Costing (ABC)
TOC approach assumes that the operating costs are difficult to change in the short term, so that the TOC does not identify individual activities and cost drivers. Therefore, the TOC is less useful to manage costs in the long run.
On the other side, activity-based costing (ABC) has a long-term perspective that focuses on improving processes by eliminating activities that are not value-added and reduce the costs incurred by the value-added activities. Therefore, ABC is more useful for profit planning, cost control and long-term pricing.
ABC and TOC are both used to determine profitability of products. But they also have differences in the ABC to develop a long-term analysis that includes all the costs of products. While the TOC to take short-term approaches to the analysis of profitability because this theory is only based on costs related to the material.
ABC provides a comprehensive analysis of cost drivers (cost drivers) and unit costs are accurate, as a basis for strategic decisions regarding pricing and product mix in the long run. Instead TOC provides a useful method to improve short-term profitability through the adjustment of product mix for the short term and through attention to production constraints.
The superiority of ABC is to focus on activities (activity), which is what the labor and equipment to meet customer needs. ABC is commonly used by companies using the method of cost management such as target cost (target costing) and TOC.
Corporate Diversification Strategy
A company implementing a Corporate Diversification Strategy when the company was operating in industries or markets a wide range simultaneously. Diversification strategies are implemented when they operate in industries that varied simultaneously while the Geographic Market Diversification Strategy implemented by companies that operate in markets geographically diverse simultaneously. If both are combined diversification strategy, will result in Product-Market Diversification Strategy.
There are three kinds of Corporate Diversification Types, namely:
- Diversified Corporate Limited, which occurs when all or nearly all of the company’s activities take place on a single industry and geographic market consists of two subtypes, namely: (a) a single business companies (95% or more of the company’s revenue comes from a single product market), (b) the dominant business firms (between 70% and 95% of company revenue comes from a single product market)
- Related to Corporate Diversification, which occurs when less than 70% of company revenue comes from a single product markets and business lines which are connected diverse, consisting of: (a) Related constrained i.e. less than 70% of company revenue comes from a single business and different businesses sharing relationships and attributes, (b) Related Linked i.e. less than 70% of company revenue comes from a single business and the different businesses just to share some attributes or relationships and the relationships and attributes is different.
- No Related Corporate Diversification: less than 70% of company revenue comes from a single business and there is little or relationships between attributes of business.
Economies of Scope happen to a company when the value of the products or services sold increased as a function of the number of businesses that run the company. Economies of Scope worth Economies of Scope the extents to which a company increase revenues or lower costs than if the Economies of Scope are not used.
Alliances Strategy or Community Strategy
A Strategic Alliance or the Guild is where two or more companies or independent organizations that cooperate in the development, manufacture, or sell products or services.
Strategic Alliances are grouped into 3 categories:
- Alliances Non equity
- Equity Alliances
- Joint Venture
Non-equity Alliances are where the companies agree to cooperate in developing, manufacturing, or selling products or services, but they do not take their personal wealth or form an independent organizational unit to manage their joint venture.
Various kinds of agreements in non-equity alliances:
- Licensing Agreements, where one company follows another company to use its brand name in product sales.
- Supply Agreements, whereby one company agrees to supply to other companies.
- Distributions Agreements, where one of the companies agreed to distribute its products to other companies.
Equity Alliances are where firms cooperate with an agreement regarding property rights of the shares in the alliance partner.
Joint Venture is where the companies work together to establish a legally independent company with individual investments so as to produce a profit.
Strategic alliances add value by exploiting opportunities and neutralize threats that exist in the company.