Costs


Costs are all cash outflows associated with a strategic initiative that are directly related to the strategic initiative. At a high level, costs can be considered payment for the resources required to implement and sustain the strategic initiative. As an example, acquisitions often require technology systems integration between two companies to eliminate redundancies and ensure consistent business operation. This can require outside expertise in systems integration, internal labor costs, and perhaps the purchase of additional software and hardware.

Costs can be classified into the following three categories:

  1. Investment Costs. Investment costs are easy outflows that become assets. These costs appear on a company's balance sheet and typically involve the purchase of:

    • Physical assets—e.g., property and equipment, (For example, a car company that wants to diversify by making golf carts will have to purchase specialized manufacturing machinery.)

    • Working capital—e.g., inventory, accounts receivable, and consumables items. (This can include inventory such as the raw materials, such as sheet metal, that are needed to build the golf carts in the previous example.)

    • Intangible assets—e.g., acquisition of software patents and trademarks. (Using the same example, this can include the purchase of a patent on a superior golf cart design.)

    Investment costs are used to calculate noncash charges such as depreciation and amortization.

  2. Operating Costs. Operating costs are all costs required to sustain a strategic initiative. To build on our automotive company example, the plant machinery that is specifically for the assembly of golf carts will require ongoing maintenance. This maintenance expense can be attributed directly to this strategic initiative and should be accounted for as an operating cost cash flow.

  3. Termination Costs. Termination costs are all costs required to either terminate the Strategic Alternative or to transition it from one significant lifecycle stage to the next. Continuing with the auto company diversification example, costs associated with the sale of the company based on the holding period of the company can be considered termination costs.




Translating Strategy into Shareholder Value. A Company-Wide Approach to Value Creation
Translating Strategy into Shareholder Value: A Company-Wide Approach to Value Creation
ISBN: 0814405649
EAN: 2147483647
Year: 2003
Pages: 117

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