The document discusses the importance of identifying cost drivers and dynamics to achieve cost advantages in firms through strategic cost analysis. It outlines steps to analyze costs, such as diagnosing cost drivers and competitor value chains, and emphasizes the role of differentiation in enhancing a firm's unique value proposition. Key strategies involve controlling cost drivers and reconfiguring the value chain to improve competitive positioning.

1. Identify
Cost Drivers

2. Cost Dynamics
• What cause the change of cost drivers

3. Cost Dynamics
• Industry real growth
• Differential scale sensitivity
• Different learning rates
• Differential technological change
• Relative inflation of costs
• Aging
• Market adjustment

4. How to Achieve Cost Advantage

5. Analyze Cost Advantage

6. Control Cost Drivers
• E.g., control scale – gain the appropriate
firm size

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. 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. Cost Focus
A firm dedicates its efforts to a well-chosen
segment of an industry can often lower its
costs significantly.

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

12. Identify Sources of
Differentiation

13. Drivers of Uniqueness
• Policy Choices
• Linkages
– Linkages within the value chain
– Supplier linkages
– Channel linkages
• Timing
Be the first
• Location

14. 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”