Key elements in Strategic cost Management26th February 2021
There are three important components of strategic cost management:
- Strategic Positioning Analysis: It determines the company’s comparative position in the industry in terms of performance.
Strategic positioning analysis is an approach for researching what future environments might be like in your internal corporate structure as well as your external environment and determining how you can use the choice of business strategies to get from your current situation to these desirable goals.
Analysis of the status-quo often involves using some fairly standard strategic management tools such as:
- SWOT analysis: Strengths and weaknesses within your firm; opportunities and threats within the external competitive market.
- Product/market matrix: Establishing what new markets, product changes, product lines or market variations could prove profitable.
- Portfolio analysis: Establishing which of your projects are potential cash cows, stars, wildcats or dogs.
2. Cost Driver Analysis: Cost is driven by different interrelated factors. In strategic cost management, the cost driver is divided into two categories, i.e. structural cost drivers and executional cost drivers. It examines, measures and explains the financial effect of the cost driver concerned with the activity.
Cost driver analysis is concerned with determining what the actual drivers of activity costs are within your operations. The most popular type of analysis for this is activity-based costing (ABC) which aims to establish what indirect causes can be related to specific activities.
This has a bearing on strategic cost management since cost drivers can actually be determined by both structural cost drivers and executional cost drivers.
- Structural cost drivers relate to strategic management choices the company undertakes in relation to actual structure of their operations (scale and scope) as well as the complexity of their products and technologies used. A more complex working environment (products, technologies and production) leads to higher structural costs.
- Executional cost drivers relate to the actual operational processes and norms within operation. The effective use of staff, process layouts, just-in-time processes, etc. all have a bearing on the cost of executing activities within the firm.
3. Value Chain Analysis: The process in which a firm recognizes and analyses, all the activities and functions that contribute to the final product. It was propounded by Michael Porter (1985), to show the way a customer value assembles along the activity chain that results in the final product or service.
Value chain analysis is an approach used to determine the series of activities involved in creating and building value within your operations. It requires a systematic approach to examining each different element in your primary activities as well as support activities.
The operations of the organization may actually be split out into both primary as well as support activities.
- Primary activities: Inbound logistics, operations, outbound logistics, marketing & sales and service.
- Support activities: Procurement, technology development, human resources management and firm infrastructure.