Diagnosing Cost and Benefit Drivers • 321

particular case involves identifying who the firm’s prospective buyers are, understanding how they might use the firm’s product or service, and discovering which of their needs the firm’s product satisfies.

Benefit drivers can be classified along five dimensions:

1.Physical Characteristics of the Product Itself. These drivers include factors such as product performance, quality, features, aesthetics, durability, and ease of installation and operation.

2.The Quantity and Characteristics of the Services or Complementary Goods the Firm or Its Dealers Offer for Sale. Key drivers here include postsale services, such as customer training or consulting, complementary products (e.g., spare parts) that the seller bundles with the product, product warranties or maintenance contracts, and the quality of repair or service capabilities.

3.Characteristics Associated with the Sale or Delivery of the Good. Specific benefit drivers include speed and timeliness of delivery, availability and favorability of credit terms, location of the seller, and the quality of presale technical advice.

4.Characteristics That Shape Consumers’ Perceptions or Expectations of the Product’s Performance or Its Cost to Use. Specific drivers include the product’s reputation for performance, the seller’s perceived staying power or financial stability (this would be important for industrial transactions in which the buyer anticipates an ongoing relationship with the seller), and the product’s installed base (i.e., the number of consumers currently using the product; a large installed base would lead us to expect the costs of developing product know-how to be low).

5.The Subjective Image of the Product. Image is a convenient way of referring to the constellation of psychological rewards that the consumer receives from purchasing, owning, and consuming the product. Image is driven by the impact of advertising messages, packaging, or labeling, and by the prestige of the distributors or outlets that carry the products.

Methods for Estimating and Characterizing Costs and Perceived Benefits

Estimating Costs

Most firms invest considerable energy in measuring their own costs. Modern accounting tools such as activity-based costing (ABC) lend considerable precision to such calculations. Some firms are able to get good accounting data on their rivals; this is common in regulated markets like hospitals. In the absence of accounting data, firms can use activity cost analysis to make reasonably educated guesses about a firm’s cost position vis à vis the competition.21 When possible, activity cost analysis applies precise cost accounting data to each step in the vertical chain of production for all competing firms. Such detailed competitive intelligence is rarely available. More often, the analyst must rely on economics, rather than accounting, to compare costs across firms.

The economic approach to cost comparisons begins by identifying the key cost drivers in production. Cost drivers include obvious factors such as local labor market conditions and taxes, as well as subtle factors such as worker productivity and costs of regulatory compliance. We identified many other cost drivers in the previous chapter, when we discussed opportunities for achieving cost advantage.

The next step is to weigh how each competitor stacks up on each cost driver. Who pays the highest wages? Whose workers are most productive? Whether by crunching some data or relying on third-party research, it is sometimes possible to make fairly

322 • Chapter 9 • Strategic Positioning for Competitive Advantage

TABLE 9.3

Cost Comparison Scorecard

Economies of scale Economies of scope Learning economies Capacity utilization Wages

Labor efficiency

(FTE per unit output) Materials purchasing

costs

Materials efficiency Others (specific to

industry in question)

Overall Position 5

precise estimates of the resulting cost differentials. For example, consider that labor costs account for about half of all hospital costs. If a particular hospital faces a soft local labor market and is able to pay 10 percent lower wages than hospitals in other communities, this will give it a 5 percent cost advantage. (Just multiply the wage difference by the share of total costs: 0.10 3 0.50 5 0.05.) Similar calculations can be performed for other cost drivers.

When it is not possible to make precise estimates of cost differences, one must rely on more qualitative approaches. Though less rigorous, they may still point to important cost differences across firms. Here are the steps:

1.List the industry’s cost drivers. Table 9.3 provides a generic list. The last row is labeled “others,” acknowledging that specific cost drivers will vary by firm and industry.

2.Rate the cost drivers on a 5-point scale according to their relative importance to total costs.22 For example, if materials costs are a very small portion of total costs, then this should receive a rating of 1 (low importance). Fill the column in Table 9.3 labeled “Importance.”

3.Rate each firm’s relative position on each cost driver, again using a 5-point scale. A rating of 1 indicates that the firm has a preferred position (relatively low cost). Fill in the next column of Table 9.3.

4.Multiply the importance rating (column 1) by the relative position rating (column 2) and plug this cost driver “score” into the last column.

5.The firm’s overall position is the sum of its cost driver scores.

Estimating Benefits

A product’s perceived benefit is more difficult to estimate. Any approach to estimating and characterizing benefits has four components. First, the firm must measure the benefits provided to the consumer. Second, it must identify the relevant benefit drivers. Third, it must estimate the magnitude of the benefit. Fourth, it must identify the willingness of consumers to trade off one driver for another. A full analysis of the