Industry Cost Drivers

Industrial Goods
•Raw materials including oil, natural gas, metals, •Human capital costs including engineers, labor/manufacturing force and sales force •R&D
Upstream -exploration and production expenditures; Midstream -transportation, and storage costs; Downstream -refining and marketing costs. OPEC: influences global price.
Airline industry is capital and labor intensive Fuel: Fuel costs are highly volatile and can range anywhere from 25% -40% of the total cost for an airline Labor: costs in 2009 was 26% of the total cost. Labor is unionized, and pilots have few substitutes •Includes pilots, attendants, ground services, dispatchers, maintenance, customer service Equipment: is around 10% of the total cost •Some airlines lease fleets rather than buy
Capital expenditures of 2010: GM $6.0 billion, Ford $4.5-5 billion, Toyota $8.1 billion. Costs breakdown: plants, raw materials, design, production, labor, distribution, marketing, and customer service. Suppliers: number shrinking, due to globalization, reduced volume from US automakers, high material and labor costs. Oil prices and raw material prices Cost cutting tactics: higher unit production volume, savings on parts and labor, improved manufacturing efficiencies.
Online Services and Storage
The online industry relies heavily on innovation (a large portion of which comes from M&As of startup companies), customer relations and IT infrastructure. Conventional costs such as physical stores, fragmented inventory spaceand manpower are very low.
Computer Software
The biggest cost software companies traditionally faced was related to the development of the products. In the past, the huge allure of the software industry was its relatively low operational costs once the product has been developed, and such costs have shrunk even more in the last few years due to online distribution. However, piracy has plagued most of the software industry and increased the cost of protecting the companies’ intellectual property.
Hardware and Digital Devices
The hardware industry relies heavily on component manufacturers, which are exposed to variance in material prices), environmental regulation, and cost of labor (as most manufacturing is done in developing countries). Hardware companies are also required to invest heavily in R&D.
Semi-conductor companies live and die by their ability to be cost efficient •Constant pressure from market and customers to develop better, cheaper products in a short time frame •As noted above, each product has a long lead time, so a company will incur costs for a long time before that product generates any revenue •As noted in “Trends”, historically complete process companies have outsourced some of the production process in order to be more lean and cost efficient
•R&D -costs higher than any other industry; can take 10+ years for new drug development •Sales and Marketing -US companies spend approximately $20B/year on promotions
Medical Devices
-Research and development -regulatory approval and compliance process -Federal and local taxes -Sales and marketing operations
Hospital Facilities
Labor Costs (Doctors, Nurses, Admins) Uncompensated Care: high % bills not billed to insurance is written off as bad debt Taxes: non-profits are exempt from some taxes
Healthcare Payers
Purchases of medical and Rx services/ products) comprise ~72% of costs; influenced by utilization and cost inflation. •Relative to other sectors of healthcare, the health insurance industry is neither capital nor labor intensive.
Banking and Financial Services
Research(whether to buy/sell securities, or suggest a specific merger) Salary and benefits, supplies, insurance. Losses on investments like loan defaults Risks, such as a sudden demand from many customers to redeem their money
Media and Entertainment
The M&E industry is labor intensive in terms of costs for “creative” talent and sales staffs, which can comprise 40% -50% of costs for a company or project (one movie). Marketing also represents a large portion of costs, given the competition for consumer attention. Capital investments in digital technologies represent a newer but growing area of cost
•Fierce competition in an essentially commodity market has led to cost competition between companies •Efficient billing systems are a way for companies to decrease cost and improve margins •Expanding a company’s network and service offering are large cost drivers •Smaller players may have to pay for connectivity which will increase their costs
Inventory management -critical to minimize cost, increase response times and increase profitability •Real Estate -number of stores and location decisions are important given high fixed costs
Household Durables
•Capital intensive significant investment to improve efficiency •Significant spends on marketing. sales and R&D •Raw materials costs significant as much as 50% of revenues •Futures contracts to protect cost of inputs •Environmental and other regulatory compliance in production / waste disposal
Household Non-durables
Often carry large inventories •Capital intensive manufacturing and R&D processes •Compliance with regulation re: production and waste disposal •Currency translations and tariffs impact profit •Supplier network and sourcing •Distribution network and shipping
•Labor -largest cost for restaurant operators •Raw materials -accounts for roughly a third of sales •Real Estate -number of restaurants and location decisions •Other -product innovation, consumer research
Non-alcoholic Beverages
Packaging -the cost of plastic increases over the years Taxes -on inputs (egsugar) and vice taxes (falls on end users -reduces demand) Wageswithin the industry are noticeably higher than the national average
Beer, Wine and Distilled Spirits
Packaging & Other raw input costs -continue to rise over time Shipping -heavy products and rising gas prices Taxes & Regulation-complex three tier distribution system and heavy federal/state taxation
Mining and Precious Metals
Main costs of production: Location -Understand cost in certain areas and risk due to political unrest Ore Quality-Oxide ores are better because it is easier to extract the precious metals Mine Type -Most underground mines are more expensive than open pit mines •Company’s must manage costs in order to maintain good financial health and production levels in the face of volatile gold prices •Producers usually publish their cost of production in their annual report
•There are high fixed costs upfront in order to build new generation plants •A lot of capital is required to enter the market •Marginal costs are relatively low, i.e. it is not costly to offer one more kilowatt-hour to one more person •Economies of scale are a very effective way to reduce costs in this industry

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