Background Note | HBS Case Collection | October 2007 (Revised January 2009)

Analyzing Relative Costs

by Hanna Halaburda and Jan W. Rivkin

Abstract

Introduces students to the technique of relative cost analysis, a core technique of strategists. Among the intricate quantitative analyses that strategists undertake, relative cost analysis may be the most common. The goal of a relative cost analysis is simply to estimate how a company's costs compare to a rival's. Companies examine relative costs for a host of reasons: to anticipate how a rival is likely to react to a price change; to predict how a price war may evolve; to test whether a cost advantage it believes it has is real and sustainable; to decide how low a company must bid in order to win a competitive contract from a rival; to identify opportunities for internal cost reduction; to estimate, in the context of an acquisition, how much the costs of an acquired company might be reduced and what a reasonable price might be for the company; and so forth.

Keywords: Cost; Management Analysis, Tools, and Techniques; Mathematical Methods; Competition; Competitive Advantage;

Citation:

Halaburda, Hanna, and Jan W. Rivkin. "Analyzing Relative Costs." Harvard Business School Background Note 708-462, October 2007. (Revised January 2009.)