Cost Dynamics

Description of Cost Dynamics. Explanation.

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Definition Cost Dynamics. Description.

Cost Dynamics is a term used by Porter to indicate that in addition to Analyzing Cost behavior at a point in time (Cost Drivers), a firm must also consider how the absolute and relative cost of Value Activities will change over time independent of its strategy.

A firm with insight into cost dynamics may be able to position itself to gain a Cost Advantage by anticipating these changes and moving quickly to respond to them.

Sources of Cost Dynamics

The most important sources of cost dynamics are:

Industry Real Growth. For example, growth of an entire industry may open up possibilities to achieve Economies of Scale.
Differential Scale Sensitivity. As market or sales volumes grow or decrease, this may effect some firms more than others.
Different Learning Rates.
Differential Technological Change.
Relative Inflation of Costs. For example if oil prices go up, this may shift the relative cost of certain activities compared to others.
Aging. Older machines require more maintenance costs. An older employee typically receives a higher salary.
Market Adjustment. When competitors are increasingly adopting similar value activities, this may increase the cost level for these activities.

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End of description Cost Dynamics. An explanation.