Cost Dynamics

A firm must consider how the absolute and relative cost of value activities will change over time independent of its strategy. Porter terms this cost dynamics.

The most common sources of cost dynamics include: industry real growth, differential scale sensitivity, different learning rates, differential technological change, relative inflation of costs, aging (older offshore drilling rigs require more maintenance and insurance), market adjustment. Cost dynamics can lead to significant changes in industry structure and relative cost position.

Gaining Cost Advantage

A firm has a cost advantage if its cumulative cost of performing all value activities is lower than competitors' costs. A firm's relative cost position is a function of:

  • the composition if its value chain versus competitors'
  • its relative position vis-a-vis the cost drives of each activity.

There are two major ways to achieve a cost advantage:

  1. Control cost drivers. A firm can gain and advantage with respect to the cost drivers of value activities representing a significant proportion of total costs.
  2. Reconfigure the value chain. A firm can adopt a different and more efficient way to design, produce, distribute, or market the product.

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Generic Business Unit Strategies
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