The value chain and cost analysis

The behavior of a firm’s costs and its relative cost position stem from the value activities the firm performs in competing in an industry. A meaningful cost analysis, therefore, examines costs within these activities and not the costs of the firm as a whole. Each value activity has its own cost structure and the

Cost Drivers of the firm

Ten major cost drivers determine the cost behavior of value activities: economies of scale, learning, the pattern of capacity utilization, linkages, interrelationships, integration, timing, discretionary policies, location, and institutional factors. Cost drivers are the structural causes of the cost of an activity and can be more or less under a firm’s control. Drivers often

The Cost of Purchased Inputs in firm

Procurement has strategic significance in almost every industry, but rarely has sufficient stature in firms. Every value activity employs purchased inputs of some kind, ranging from raw materials used in component fabrication to professional services, office space, and capital goods. Purchased inputs divide into purchased operating inputs and purchased assets. The total cost of

Segment Cost Behavior of the firm

Thus far I have described how to analyze the cost behavior of a business unit as a whole. In practice, however, a business unit usually produces a number of different product varieties and sells them to a number of different buyers. It may also employ a number of different distribution channels. For example, a

Cost Dynamics in firm

In addition to analyzing cost behavior at a point in time, a firm must consider how the absolute and relative cost of value activities will change over time independent of its strategy. I term this cost dynamics. An analysis of cost dynamics enables a firm to forecast how the cost drivers of value activities

Determining the Relative Cost of Competitors

The value chain is the basic tool for determining competitor costs. The first step in determining competitor costs is to identify competitor value chains and how activities are performed by them. The process is the same as that employed by a firm to analyze its own value chain. In practice it is often extremely

Gaining Cost Advantage

There are two major ways that a firm can gain a cost advantage: Control cost drivers. A firm can gain an advantage with respect to the cost drivers of value activities representing a significant proportion of total costs. Reconfigure the value chain. A firm can adopt a different and more efficient way to design,

Sustainability of Cost Advantage

Cost advantage will result in above-average performance only if the firm can sustain it. Improving relative cost position in unsustainable ways may allow a firm to maintain cost parity or proximity, but a firm attempting to achieve cost leadership strategy must also develop sustainable sources of cost advantage. Cost advantage is sustainable if there

Implementation and Cost Advantage

This chapter has focused on how to achieve a cost advantage through changes in strategy and the way activities are performed. However, the success of cost leadership hinges on a firm’s skills in actually implementing it on a day to day basis. Costs do not go down automatically or by accident but rather as

Pitfalls in Cost Leadership Strategies

Many firms do not fully understand the behavior of their costs from a strategic perspective and fail to exploit opportunities to improve their relative cost position. Some of the most common errors made by firms in assessing and acting upon cost position include: Exclusive Focus on the Cost of Manufacturing Activities. When one mentions

Steps in strategic cost analysis in firm

The techniques described in this chapter can be summarized by outlining the steps required in strategic cost analysis:  Identify the appropriate value chain and assign costs and assets to it. Diagnose the cost drivers of each value activity and how they interact. Identify competitor value chains, and determine the relative cost of competitors and

Sources of differentiation Advantage of the firm

A firm differentiates itself from its competitors when it provides something unique that is valuable to buyers beyond simply offering a low price. Differentiation allows the firm to command a premium price, to sell more of its product at a given price, or to gain equivalent benefits such as greater buyer loyalty during cyclical

The cost of differentiation infirm

Differentiation is usually costly. A firm must often incur costs to be unique because uniqueness requires that it perform value activities better than competitors. Providing superior applications engineering support usually requires additional engineers, for example, while a highly skilled sales force typically costs more than a less skilled one. Achieving greater product durability than

Buyer value and differentiation of the firm

Uniqueness does not lead to differentiation unless it is valuable to the buyer. A successful differentiator finds ways of creating value for buyers that yield a price premium in excess of the extra cost. The starting point for understanding what is valuable to the buyer is the buyer’s value chain. Buyers have value chains

Buyer Purchase Criteria for the firm

1. Buyer Purchase Criteria Applying these fundamentals of buyer value to a particular industry results in the identification of buyer purchase criteria—specific attributes of a firm that create actual or perceived value for the buyer. Buyer purchase criteria can be divided into two types: Use criteria. Purchase criteria that stem from the way in

Differentiation strategy of the firm

Differentiation stems from uniquely creating buyer value. It can result through meeting use or signaling criteria, though in its most sustainable form it comes from both. Sustainable differentiation requires that a firm perform a range of value activities uniquely that impact those purchase criteria. Meeting some purchase criteria requires that a firm perform just

Steps in differentiation of the firm

The concepts in this chapter can be summarized by outlining the analytical steps necessary for determining the bases for differentiation and selecting a differentiation strategy. Determine who the real buyer is. The first step in differentiation analysis is to identify the real buyer. The firm, institution, or household is not the real buyer, but

Technology and competition

Any firm involves a large number of technologies. Everything a firm does involves technology of some sort, despite the fact that one or more technologies may appear to dominate the product or the production process. The significance of a technology for competition is not a function of its scientific merit or its prominence in

Technology strategy: The Choice of Technologies to Develop

At the core of a technology strategy is the type of competitive advantage a firm is trying to achieve. The technologies that should be developed are those that would most contribute to a firm’s generic strategy, balanced against the probability of success in developing them. Technology strategy is a potentially powerful vehicle with which

Technology strategy: Technological Leadership or Followership

The second broad issue a firm must address in technology strategy is whether to seek technological leadership. The notion of technological leadership is relatively clear—a firm seeks to be the first to introduce technological changes that support its generic strategy. Sometimes all firms that are not leaders are viewed as technological followers, including firms