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Value Chain: Identify Cost Drivers

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5. Dynamics & Steps in Analysis
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Value Chain: Identify Cost Drivers

  1. 1. Identify Cost Drivers
  2. 2. Cost Dynamics • What cause the change of cost drivers
  3. 3. Cost Dynamics • Industry real growth • Differential scale sensitivity • Different learning rates • Differential technological change • Relative inflation of costs • Aging • Market adjustment
  4. 4. How to Achieve Cost Advantage
  5. 5. Analyze Cost Advantage
  6. 6. Control Cost Drivers • E.g., control scale – gain the appropriate firm size
  7. 7. Reconfigure the Value Chain • Reconfiguration of the value chain presents the opportunity to fundamentally restructure a firm’s cost, compared to settling for incremental improvements. • By altering the basis of competition in a way that favors a firm’s strengths, it may change the important cost drivers in a way that favors a firm.
  8. 8. Steps in Strategic Cost Analysis 1. Identify the appropriate value chain and assign costs and assets to it. 2. Diagnose the cost drivers of each value activity and how they interact. 3. Identify competitor value chains, and determine the relative cost of competitors and the sources of cost differences. 4. Develop a strategy to lower relative cost position through controlling cost drivers or reconfiguring the value chain and/or downstream value.
  9. 9. Cost Focus A firm dedicates its efforts to a well-chosen segment of an industry can often lower its costs significantly.
  10. 10. Differentiation • Emphasize on a unique source of differentiation in the Value Chain, rather than on products or markets only • Differentiation base on buyers’ value, not only difference that buyers do not value • Should consider the cost of differentiation
  11. 11. Identify Sources of Differentiation
  12. 12. Drivers of Uniqueness • Policy Choices • Linkages – Linkages within the value chain – Supplier linkages – Channel linkages • Timing Be the first • Location
  13. 13. Drivers of Uniqueness • Interrelationship Sharing a value activity with sister business units. E.g., sharing a sales force for both insurance and other financial products • Proprietary learning • Integration – e.g., integrating online systems to current ordering systems • Scale • Institutional factors – e.g., “Madame’s route”

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