Competitive-Cost Analysis: Cost-Driver Framework

9 Pages Posted: 30 May 2017 Last revised: 25 Aug 2018

See all articles by Timothy M. Laseter

Timothy M. Laseter

University of Virginia - Darden School of Business; Emory University - Goizueta Business School; University of Navarra, IESE Business School; London Business School; New York University (NYU) - Leonard N. Stern School of Business

Ken Heckel

University of Virginia - Darden School of Business

Angela Huang

University of Virginia - Darden School of Business

Abstract

The first in a three-part series on competitive-cost analysis, this note introduces cost drivers, presents a conceptual framework for organizing them, and explains various applications of competitive-cost analysis. It also offers a set of principles to consider when developing cost models for competitive analysis.

Excerpt

UVA-OM-1254

Rev. Aug. 9, 2018

Competitive-Cost Analysis: Cost-Driver Framework

An understanding of the factors that drive the microeconomics of a business provides the insight needed for strategic and tactical improvements in operational effectiveness. Competitive-cost analysis, a technique for analyzing the cost structure of two competing companies, brings the drivers of competitive differences into high resolution for managerial action. A rigorous competitive-cost analysis facilitates a variety of decisions—ranging from product/service redesign to the global-operations “footprint” to business-process outsourcing—by highlighting the key factors that drive operational costs. Unfortunately, most accounting and financial data address the elements of cost rather than the factors that drive the cost (cost drivers). This first of three notes on competitive-cost analysis (see also UVA-OM-1255 and UVA-OM-1256) presents a conceptual framework for organizing cost drivers and explains various applications of competitive-cost analysis. It also offers a set of principles to consider when developing cost models for competitive analysis. The second note introduces four specific cost-modeling tools to analyze cost drivers. The final note provides more details on the mechanics of estimating scale curves and adjusting for utilization effects.

The Role of Competitive-Cost Analysis

Competitive-cost analysis represents a strategic application of cost modeling. At the highest level, it allows for a direct comparison of a company and one of its products or services with a direct competitor or competitive offering. During the 1980s, many US manufacturing concerns benchmarked their operations against Japanese competitors in an attempt to understand how the Japanese were able to offer superior products at lower prices. Over time, initial assumptions of “price dumping,” wage-rate advantages, and superior technology were replaced by an appreciation for what became known as “Lean manufacturing.” Ultimately, this insight led to a dramatic renewal throughout much of the US manufacturing sector. Today, competitive-benchmarking efforts often focus on such developing regions as India and China in an attempt to understand whether transportation costs and lead-time delays will offset the labor-cost advantages available in such developing regions. These insights now shape the footprint of manufacturing companies as well as the deployment of resources in “backroom” operations in a wide range of industries.

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Keywords: competitive analysis, operations strategy, cost drivers, cost models

Suggested Citation

Laseter, Timothy M. and Heckel, Ken and Huang, Angela, Competitive-Cost Analysis: Cost-Driver Framework. Darden Case No. UVA-OM-1254, Available at SSRN: https://ssrn.com/abstract=2974924

Timothy M. Laseter (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

HOME PAGE: http://www.darden.virginia.edu/faculty/laseter.htm

Emory University - Goizueta Business School ( email )

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Atlanta, GA 30322-2722
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University of Navarra, IESE Business School ( email )

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Barcelona, 08034
Spain

London Business School ( email )

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Regent's Park
London, London NW1 4SA
United Kingdom

New York University (NYU) - Leonard N. Stern School of Business ( email )

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Suite 9-160
New York, NY NY 10012
United States

Ken Heckel

University of Virginia - Darden School of Business

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Angela Huang

University of Virginia - Darden School of Business

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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