Strategic cost Management concept and Philosophy26th February 2021
Strategic cost management is the process of reducing total costs while improving the strategic position of a business. This goal can be accomplished by having a thorough understanding of which costs support a company’s strategic position and which costs either weaken it or have no impact. Subsequent cost reduction initiatives should focus on those costs in the second category. Conversely, it may be useful to increase costs that support the strategic position of the business.
It is a process of combining the decision-making structure with the cost information, in order to reinforce the business strategy as a whole. It measures and manages costs to align the same with the company’s business strategy.
It is almost never worthwhile to cut costs in strategically important areas, since doing so reduces the customer experience and therefore will eventually lead to a decline in sales. Consequently, management needs to be involved in cost reduction activities, so that they can provide input regarding how certain costs must be incurred in order to support the competitive position of the firm.
Strategic cost management is a continuing process, since the strategy of a firm may change over time. Thus, certain costs may be sacrosanct when one strategy is being used, but can be readily eliminated when the strategy shifts.
In short, Strategic cost management is the development of cost management information for strategic management purpose. Strategic cost management can be defined as “scrutinizing every process within your organisation, knocking down departmental barriers, understanding your suppliers’ business, and helping improve their processes.”
Michael Porter in competitive advantage prepared the way for a strategic emphasis in cost management by developing a framework for identifying a firm’s competitive strategy.
Porter’s concepts of cost leadership and differentiation have had a strong influence on management education. These concepts provide the basis on which the strategic approach to cost management is based because they explain what a firm should do to succeed.
Thus, there are two steps in Strategic Cost Management: first, to identify (using Porter’s framework) what managers must do to make the firm succeed, and second, to develop cost management methods and practices to facilitate management’s efforts.
Need for SCM
- It is an updated form of cost analysis, in which the strategic elements are clearer and more formal and improves the overall position of the company.
- It is used to analyse cost information, and use it to develop various measures to achieve a sustainable competitive advantage.
- It provides a better understanding of the overall cost structure in the quest of gaining a sustainable competitive advantage.
- It uses cost information specifically to govern the strategic management process; formulation, communication, implementation and control.
- It helps in identifying the cost relationship between value chain activities and its process of management to gain competitive advantage.
Strategic cost management has become an essential area now a day. While formulating the strategy for the accomplishment of organisational overall objectives, different cost drivers should be clearly identified. Identification of key cost drivers helps companies to focus on key activities that will constitute almost 90% of the total costs.
In view of this, the importance of strategic cost management should not be underestimated. This implies that an organisation should be installing appropriate framework of strategic cost management to reduce its costs in key areas on which the success of organisation is mainly dependent. Strategic cost management is understood in different ways in literature.
Objectives of Strategic Cost Management:
Strategic Cost Management provides number of benefits to different organisations. It has provided the business with an improved understanding of its sources of profits.
(i) It has enabled the business to assess, at a high level, how activity-based techniques can be deployed at different levels in the business to improve its cost management process, such as in budgeting and in process improvement.
(ii) It has developed a framework for reviewing the strategic allocation of resources across the business based on core business processes and activities.
(iii) It has improved the businesses understanding of its cost drivers leading to improved articulation of its strategic plans in cost terms.