Cost Drivers Analysis

841 views
649 views

Published on

This Slideshare presentation is a partial preview of the full business document. To view and download the full document, please go here:
http://flevy.com/browse/business-document/Cost-Drivers-Analysis-76

Competitive Cost Analysis is a valuable strategic business framework, as it helps identify potential areas of competitive advantage. Competitive Cost Analysis requires the analysis of relative cost structures of competitors (or potential competitors) within our industry. The relevant unit of analysis should be as focused and specific as possible—for instance, at the business unit or the product level.

There are three techniques primarily used when conducting Competitive Cost Analysis: Financial Ratios Analysis, Value Chain Analysis, and Cost Drivers Analysis. This document will focus on Cost Drivers Analysis.

Published in: Business
0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
841
On SlideShare
0
From Embeds
0
Number of Embeds
4
Actions
Shares
0
Downloads
0
Comments
0
Likes
1
Embeds 0
No embeds

No notes for slide

Cost Drivers Analysis

  1. 1. Cost Drivers Analysis Business Strategy Framework February 25, 2014
  2. 2. 4 Competitive Cost Analysis is a framework that can be used to identify competitive advantages Competitive Cost Analysis – Overview Competitive Cost Analysis is a valuable strategic business framework, as it helps identify potential areas of competitive advantage. Competitive Cost Analysis requires the analysis of relative cost structures of competitors (or potential competitors) within our industry. The relevant unit of analysis should be as focused and specific as possible—for instance, at the business unit or the product level. There are three techniques primarily used when conducting Competitive Cost Analysis, listed below. This document will focus on the third, Cost Drivers Analysis. The selection of the Competitive Cost Analysis technique to use depends on the available time and level of detail required. COST DRIVERS ANALYSIS VALUE CHAIN ANALYSIS FINANCIAL RATIO ANALYSIS This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/cost-drivers-analysis-76
  3. 3. 7 Contents • Competitive Cost Analysis - Overview - Techniques & Level of Effort - Cost Drivers Analysis – Benefits & Limitations • Approach - Phase 1 - Phase 2 - Phase 3 - Phase 4This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/cost-drivers-analysis-76
  4. 4. 10 We may need to conduct Activity Based Costing, so that costs can be traced back to their value activities Phase 1 – Overview (2 of 2) Select Identify Quantify Refine 1 2 3 4 • High-level Activity Based Costing might be required to accurately assign costs to value activities (i.e. those activities found on our company’s value chain) • Data for completing this analysis should be available from Corporate Finance • Analysis should focus on the costs to produce and deliver relevant products/services under analysis • Additional costs related to other products and services should be ignored • For each business activity, the primary cost drivers should be listed • This requires knowledge of industry leading practices and company-specific performance data Remember to focus only on costs related to the products or services under analysis—ignore all other costs. This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/cost-drivers-analysis-76
  5. 5. 13 Cost drivers having a significant cost impact should be review for structural differences Phase 1 – Cost Driver Competitive Analysis Select Identify Quantify Refine 1 2 3 4 • Cost drivers determined to have a significant impact on company’s cost structure should be reviewed • Determine if potential structural differences exists between our company and competitors • Could these structural differences result in a competitive advantage for us? • This requires knowledge of industry leading practices and company-specific performance— may need to consultant 3rd parties for this information POTENTIAL STRUCTURAL DIFFERENCE AMONG COMPETITORS BETTERWORSESAMEWORSECompetitor C BETTERWORSESAMESAMECompetitor B BETTERWORSEBETTERSAMECompetitor A Product Complexity TechnologyLearningScale COMPETITOR PERFORMANCE POTENTIAL STRUCTURE DIFFERENCE Moderate Moderate High High Structural differences may lead to uncovering true competitive advantages (or disadvantages!). This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/cost-drivers-analysis-76
  6. 6. 16 Phase 2. Identify the components of the critical cost drivers Phase 2 – Overview The component breakdown of each cost driver should be clearly broken down and agreed upon by key stakeholders and decision makers. Select Identify Quantify Refine 1 2 3 4 • For each of the cost drivers selected, the price and quantity components should be identified • The “product complexity” cost driver is comprised of raw materials cost, labor cost, sourcing costs, etc. • The “technology” cost driver is comprised of equipment costs, maintenance costs, overhead costs, labor costs, R&D costs, etc. • Identifying components of critical cost drivers will aid in quantifying potential cost structure differences among competitors • Remember to consider level of detail and effort required • Often it is sufficient to rank competitors on critical cost drivers and assign relative ranges to these competitors, rather than quantifying cost position of each competitor on each critical cost driver This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/cost-drivers-analysis-76
  7. 7. 1 Flevy (www.flevy.com) is the marketplace for premium documents. These documents can range from Business Frameworks to Financial Models to PowerPoint Templates. Flevy was founded under the principle that companies waste a lot of time and money recreating the same foundational business documents. Our vision is for Flevy to become a comprehensive knowledge base of business documents. All organizations, from startups to large enterprises, can use Flevy— whether it's to jumpstart projects, to find reference or comparison materials, or just to learn. Contact Us Please contact us with any questions you may have about our company. • General Inquiries support@flevy.com • Media/PR press@flevy.com • Billing billing@flevy.com

×