Strategic Management: Formulation and Implementation

Segment Cost Behavior

The cost analysis at the segment level must often supplement analysis at the business unit level. Identifying important differences in the value activities for different segments is a starting point in segment cost analysis.

A firm should analyze the costs of those product lines, buyer types, or other portions of its activities that: have significantly different value chains, appear to have different cost drivers, employ questionable procedures for allocating costs.

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.