Cost advantage is one of two types of competitive advantage a firm may possess. Many strategic plans establish "cost leadership" or "cost reduction" as goals.
This section describes a framework for cost analysis. The framework aims to help a firm understand the behavior of cost in a broad, holistic way that will guide to search for a sustainable cost advantage and contribute to the formulation of contribute strategy.
The Value Chain And Cost Analysis
The value chain provides the basic tool for cost analysis. The starting point for cost analysis is to define a firm's value chain and to assign operating costs and assets to value activities.
The disaggregation of the generic value chain into individual value activities should reflect three principles that are not mutually exclusive:
- the size and growth of the cost represented by the activity
- the cost behavior of the activity
- competitor differences in performing the activity.
Cost advantage results if the firm achieves a lower cumulative cost of performing value activities than its competitors.