cost drivers

cost drivers

elements of a firm's operations which individually and collectively determines the level of the firm's (average or unit) COSTS. The ability to ‘drive’ or ‘manage’ costs down (or contain cost increases) is an important strategic consideration where cost leadership is the key basis of the firm's COMPETITIVE ADVANTAGE over rival suppliers.

There are four main categories of cost drivers

  1. those related to firm size and scope: ECONOMIES OF SCALE (the reduction in average costs as the scale of operation increases) and ECONOMIES OF SCOPE (the reduction in average costs as the firm produces a greater variety of product);
  2. those related to cumulative experience: the EXPERIENCE CURVE (cost reductions which arise over time as the firm ‘learns’ to operate technologies and processes more efficiently);
  3. cost drivers not related to the above, industry input prices (e.g. differences in hourly wage rates payable for ‘unionised’ as opposed to non-unionised workers); location (e.g. differences in transportation costs of local versus long-haul for input procurement and product distribution); process efficiencies (cost differences due to the fact that some firms are able to achieve higher levels of PRODUCTIVITY than others) etc;
  4. those related to the organization of transactions: VERTICAL INTEGRATION AND DISINTEGRATION (cost reductions which arise when buying and selling transactions are conducted within the firm rather than through the market) and the internal organization of the firm (AGENCY COSTS are higher for some firms than others). See VALUE CREATED MODEL, RESOURCE BASED THEORY OF THE FIRM; see also ACTIVITY-BASED COSTING. Compare BENEFIT DRIVERS.

cost drivers

the factors that cause COSTS to vary within an organization and between organizations. Cost drivers can be related to the various value-creating activities within an organization. The main cost drivers are: firm size or scope (ECONOMIES OF SCALE or SCOPE); cumulative experience; (LEARNING CURVE); organization of transactions (VERTICAL INTEGRATION); and other factors such as location, raw material prices and process efficiency. The ability to ‘drive’ or ‘manage’ costs down (or to contain cost increases) is an important strategic consideration where cost leadership is the key basis of the firm's COMPETITIVE ADVANTAGE over rival suppliers. See VALUE-CREATED MODEL.