Cost is an essential consideration in any business strategy. Running a company in an efficient way is the bread and butter of traditional management, but in some industries, assessing your cost position against the positions of your competitors can have more explicitly strategic implications that are often best understood using concepts from game theory. Understanding a rival’s costs often amounts to understanding its supply curve—the amount of goods the organization will produce at a given price and, by extension, the price at which its managers might choose to exit the industry entirely.

In 1980 Carter Bales, P. C. Chatterjee, Donald Gogel, and Anupam Puri published a staff paper outlining a rigorous approach for determining how to achieve and sustain a cost advantage. Their paper, "Competitive cost analysis," introduced the concept of the business system and went on to show how strategists might use this deceptively simple tool to help companies become cost leaders. Later that year, in a McKinsey Quarterly article, Fred Gluck provided a broader description of how the business system concept could be used to help formulate strategy. Gluck’s article—"Strategic choice and resource allocation"—was referred to by Michael Porter in his 1985 book, Competitive Advantage, which...