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The Value Chain and Cost Analysis 6

This document discusses the value chain and cost analysis. It begins by explaining that a firm's costs originate from its value activities. Cost analysis examines the costs within these activities rather than the total costs of the firm. Each value activity has its own cost structure that may be affected by linkages with other activities. Gaining a lower increasing cost of value activities than competitors provides a competitive advantage through cost advantages or differentiation. The objectives of cost analysis are to analyze cost behavior, determine relative cost positions, and find ways to gain sustainable cost advantages. Steps include defining the value chain, identifying costs and assets, assigning them to activities, and separating activities based on cost drivers or behaviors. Cost behavior depends on factors like scale, learning, capacity

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50 views5 pages

The Value Chain and Cost Analysis 6

This document discusses the value chain and cost analysis. It begins by explaining that a firm's costs originate from its value activities. Cost analysis examines the costs within these activities rather than the total costs of the firm. Each value activity has its own cost structure that may be affected by linkages with other activities. Gaining a lower increasing cost of value activities than competitors provides a competitive advantage through cost advantages or differentiation. The objectives of cost analysis are to analyze cost behavior, determine relative cost positions, and find ways to gain sustainable cost advantages. Steps include defining the value chain, identifying costs and assets, assigning them to activities, and separating activities based on cost drivers or behaviors. Cost behavior depends on factors like scale, learning, capacity

Uploaded by

Md.Yousuf Akash
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Mst.

Shuly Aktar
Associate Professor
Department of Marketing
Begum Rokeya University, Rangpur
Chapter 6
The value chain and Cost Analysis

1
The value chain and Cost Analysis
►The behavior of a firm’s cost and its relative cost position
stem (originated) from the value activities.
►Cost analysis examines cost within these activities and not
the cost of the firm as a whole.
►Each of the value activity has its own cost structure
►The behavior of its cost may be affected by linkage and
interrelationships with other activities.
If the firm achieves a lower increasing cost of performing
value activities than its competitors In that case the firm will
gain competitive advantage.
Types of competitive advantage:
►Cost advantages and
► Differentiation
Benefit of competitive advantage:
►To differentiate strategies
►A strong influence on overall industry structure2
Objectives of cost analysis
►To analyzing the behavior of cost i.e. how various cost are
behaving ?
►To find out the determinants of relative cost position. And
►To find out the way a firm can gain a sustainable cost
advantage or minimize its cost disadvantage

Steps of cost analysis:


► Define firm’s value chain i.e. value activities
►Identify operating cost and assets
►Assign operating cost to value activities
Book value
►Assign assets to value activities
Replacement value

Reasons for separating value activities:


• If they represent a significant percentages of operating
costs or assets.
• If they have different cost drivers 3
• Behaviors of competitor’s activities.
Cost Behavior
Cost behavior depends on a number of structural factors that
influence cost, which is called cost driver.
Cost drivers are the structural causes of the cost of an activity
and can be more or less under a firm’s control.
It can differ among firms in the same industry if they provide
different value chain.

Major cost drivers:


►Economic or diseconomies of scale
►Learning and spillovers/spread over
► Capacity utilization
► Linkage
► Integration
► Timing
► Policy choices
► Location
► Institutional factors
4
Cost Dynamics
To analysis cost behavior, a firm must consider how the
absolute and relative cost of value activities will change over
time independent of its strategy means cost dynamics.
►It enables a firm to forecast how the cost drivers of value
activities may change
►It helps to know, which value activities will increase or
decrease in absolute and relative cost importance.

Sources of Cost Dynamics:


►Industry real growth
► Differential scale sensitivity
► Differential technological change
► Rate inflation of costs
► Aging
► Market adjustment

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