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This chapter starts with a discussion of how one can estimate the cost structure of competitors given
publicly available information and the pitfalls that can lead one to improper results. Given this
information, we then discuss what are considered best practices for managing cost structure in today‟s
business environment. We conclude with how this analysis can be used internally by product
managers who have much better cost data available to them.
Estimating Cost Structure from Publicly Available Information
Company X is a well-known U.S. technology firm with quarterly financial results as shown in Exhibit
12.1. This format is common for publicly traded companies and is based on the functional nature of
costs. First, costs of producing and delivering the product (cost of sales) are matched against the
revenues generated from sale of the products to arrive at a gross profit number. Next, the operating
expenses associated with research and development, marketing and sales, and corporate administration
(e.g., legal, accounting, and corporate management) are deducted to arrive at operating profit. For
those analysts involved in developing competitive intelligence (and financial analysts), this is the line
that is the focus of attention. It represents the profit from the primary function of the company—the
results from the normal, recurring activities that then can be extrapolated into the future. From
operating profit, taxable income is arrived at by compiling the results of other activities that are not the
primary focus of the business. Common items such as interest income on investments of excess cash
that will be needed in the future, interest expense on debt instruments, and losses from restructuring
are included in the “Other” account for Company X. As stated earlier, these are not the primary focus
of the business, are often nonrecurring and therefore cannot be extrapolated into the future, and are of
little interest to analysts. 4 Deducting income tax then yields the net income for the period. The
quarterly numbers of Company X reflect the seasonal pattern of demand for this business, with sales
peaking in quarter 2 and 3 and then falling off in quarter 4 and 1. As is evident, operating profit
follows the same pattern. For any company traded on any stock exchange in the world, information
such as this must be reported on a periodic basis. Formats will differ, but as a general rule financial
information is reported with a focus on the functional nature of the cost item, as shown in Exhibit
12.1.
Exhibit 12.1 Company X—Quarterly Income Statements (costs reported by function).