Cost Dynamics

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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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Understanding Costs In-depth

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Usage (application): Cost Drivers, Cost Behavior, Direct Costs, Indirect Costs, Controllable Costs, Uncontrollable Costs
 
 

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