Strategic cost analysis involves comparing how a company’s unit costs increase against the unit costs of key competitors activity by activity. It is a comparison of one entity’s cost position to another. Thus, identify which internal activities are sources of cost advantage or disadvantage.
The goal of the analysis is to determine whether or not one company’s costs are competitive with another’s.
There are the following steps required in strategic cost analysis:
- Identify the suitable value chain and consign costs and assets to it.
- Analyze the costs drivers of each value activity and how they interrelate.
- Categorize opponent value chains, and find out the relative cost of competitors and the sources of cost differences.
- Build up a plan to lower relative cost point through controlling cost drivers or reconfiguring the value chain and/or downstream value.
- Ensure that cost decline effort do not erode differentiation or make a conscious choice to do so.
- Test the cost decrease policy for sustainability.