Last version published: 07/08/2022 18:56
Publication number: ELQ-12722-9
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McKinsey's Industry Cost Curve Graph Model Template
A PowerPoint Template to modelize McKinsey's Industry Cost Curve to evaluate which actors will be able to serve a market with a given Price and Global Demand.
Originally developed by Ted Hall's San Francisco McKinsey & Company office, the Industry Cost Curve was formalised in a staff paper by director Don C. Watters in 1981. A must have for a performance improvement professional, the framework was built to orient strategic decisions in terms of capacity and production made by actors in substantially high and heavy fixed cost industries. It is a "classic" business school model to understand pricing, easily applicable to competitive markets.
See original 2009 article here: https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/enduring-ideas-the-industry-cost-curve
The Industry cost curve, is a microeconomic graph enabling to map production capacities for a given product in order of increasing costs, thus positioning the market price for the industry. Indeed, to determine the market price, you combine the threshold where the demand for the industry's/market's product is met, and the cost of the next available suppliers capacity .
For example: if capacities that serve the market move, what impact is there going to be on market price? What happens if a given company decreases its fixed costs? Variable costs? Is it worth investing now into new capacity at a cost level just below market price?
Before the framework was launched in the 1980s by McKinsey consultants, businesses tended to make decisions on intuition rather than careful analytics and modeling. The arrival of this framework combined with linear programming, helped to depict options and potential moves by market actors.
The framework is mostly pertinent for:
- commodity products
- near commodity products (customers get roughly the same value from the product, even if the supplier varies)
- markets where quantifiable differences in value are prevalent (e.g. travel times)
- climate change models (carbon emmissions etc.)
Another great illustration of the industry cost curve in use and an extract of Watter's work, can be found here: https://xray-delta.com/2012/04/24/do-you-know-how-to-use-this-classic-tool-industry-cost-curves/
Given the historical pertinence of this model in the business world over the last 50 years, I decided to create a simple universal template that any analyst, production planner or forecaster can play with.
By inputing market and company data in the underlying excel model, the cost curve can be drawn and market capacities per "batch" visualised (by moving the PPT square orange boxes).
The Best Practice is:
- an editable Microsoft PowerPoint Template Slide
- 1 associated/attached Excel Model to plot the graph
- 1 EXCEL Only Version
- with an online & offline 17 step-by-step methodology, with pedagogical illustrations for each step.
Should you have any questions on using this top tier cost and pricing analysis Management slide and framework, you're welcome to reach out to me via Private Message.
⭐️ Bundle of 10 McKinsey & Company Models & Frameworks (including this one):
Additional sources on Cost Curves by the Financial Times: https://www.ft.com/content/678f78f8-a714-11e4-8a71-00144feab7de
This Best Practice includes
1 PowerPoint Template Model + 1 Associated Excel Model + 1 EXCEL Only Version + 1 Online 16 Step-by-Step Methodology
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