Cost Dynamics

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What is Cost Dynamics?

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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