Cost Drivers Analysis

Cost Drivers Analysis
Business Strategy Framework
February 25, 2014

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

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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:

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.

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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!).

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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

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Cost Drivers Analysis