During the holiday, one of the tasks was to clean up and a old article from April 1998 was found titled Knowing rivals’ costs clears profit picture by George Salk who was at the time a Senior Vice President of Boston Consulting Group. If you start with the basic formula profit is the higher revenues than costs, how are costs set? All companies and many individuals spend many hours on tracking costs, which is a good thing to know. However, it is crucial to also invest in understanding what is driving their competitor’s costs.

If your rivals have a lower costs than you, they control how much money a company is going to make. The only escape is to know their costs and to act on that knowledge. The cost advantage can be based on economies of scale, depth of experience, overhead differences, supplier practices and local factors such as energy costs.

The process for determining competitor’s costs is called competitive cost benchmaking. If you are just starting it will involve work and tearing down customer products, reconstructing manufacturing and service processes down to the last machine. The information can come through public documents, surfing the internet, interviews with suppliers. The idea is to break down products and services to understand your relative cost position overall and for each section.

The result is decisions are made on Prices differently, Redesign of products, Redesign processes, Change a company’s positioning, Make different investment decisions, Involve customers, Restructure supplier arrangements.

Linking to dividend paying companies some of these companies are where they are because they have cost advantages over the competition. The key is to understand what cost advantages they have and knowing the competition changes so does basic costs – think the difference between Uber and Taxi companies, the Uber model is less. However if the industry is still relatively stable or systematic cost differences are not removed easily, why does your company continue to make money is still the issue.

There are more questions than answers, till the next time – to raising questions.