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