A2. Strategic Cost Analysis


1. Identify the individual firm’s value chain and then assign costs and assets to it


Identify individual value activities for the particular firm within its particular industry. Each of the main categories in the generic model can be subdivided into discrete activities.

E.g. Sales and Marketing might be subdivided into marketing management, advertising, sales force administration, sales force operations, technical literature, promotion, etc. This process of subdivision can continue down to increasingly narrow activities provided that they are discrete.

There are linkages between activities within the value chain. How one activity is performed will impact on the cost or performance of another. E.g. buying high quality, well-prepared raw material can simplify manufacturing and reduce waste.


2. Diagnose the key elements that drive the costs of each value activity (cost drivers)


3. Identify competitors’ value chains and determine both their relative costs and the sources of differences in cost


4. Develop a strategy to lower relative costs by controlling cost drivers or by reconfiguring the value chain itself


5. Ensure that any cost reduction does not erode differentiation or, if it does, make sure that this is a conscious choice


6. Test the cost reductions to ensure that they are sustainable