Strategic Cost Management

Source: https://www.slideshare.net/bfginc/trimming-the-fat-traditional-vs-strategic-cost-management-strategies

Strategic Cost Management linked to strategies

Strategies
- derived from the Greek word “strategos” meaning general; “stratus” meaning army and “ago” meaning leading or moving
- actions that managers take to attain one or more of organization’s goals
- all about integrating organizational activities and utilizing and allocating scarce resources to meet objectives
- blueprint of decisions in an organization
- features:
a) specialized
b) detailed
c) redefines direction toward common goals
d) effective in mobilizing resources
e) deals with long-term development rather than routine operations
- Common types:
a) Corporate
 explicitly mentioned in an organization’s mission statement
 involve overall purpose and scope of the business to help it meet expectations of stakeholders
b) Business unit
 more about how a business competes successfully in a particular market
 involve strategic decisions about
(i) choosing products
(ii) meeting consumer needs
(iii) gaining advantage over competitors
(iv) creating new opportunities
c) Operational
 how each part of the business is organized to deliver the corporate and business unit level strategic direction
 focus on the issues of resources, people, processes, etc.

Competitive advantage
- creating better customer value for the same or lower cost offered by competitors or creating equivalent value for lower cast
than offered by competitors

 customer value
 difference between what a customer receives (customer realization) and what the customer gives (customer
sacrifice)
 total product
 what the customer receives

Three generic strategies for achieving above average performance in an industry:

a) Cost leadership
- the firm sets out to be the low cost producer in its industry
- sources of cost advantage are varied and depend on the structure of the industry and may include the
(i) pursuit of economies of scale
(ii) proprietary technology
(iii) preferential access to raw materials

b) (Product) differentiation
- implemented by creating a perception among consumers that the product or service is unique, usually by being of higher
quality
- the firm selects one or more attributes that many buyers in an industry perceive as important, and positions itself to meet
those needs

c) Focus
- selecting or emphasizing an attractive market or customer segment in which to compete and developing capabilities to serve
these segments
- choosing a narrow competitive scope within an industry and tailoring its strategy to serve a particular segment with the
exclusion of others
 Two variants:
a) Cost focus
 a firm seeks a cost advantage in its target segment
 exploits differences in cost behavior in some segments
b) Differentiation focus
  a firm seeks differentiation in its target segment
 exploits the special needs of buyers in certain segments

Factors influencing cost management

1. changes in business environment and global competition
2. manufacturing technologies
3. growth of the service industry
4. advances in information technology
a) emergence of e-commerce
b) computer integrated applications
c) availability of personal computers, and software aides
d) organizational management

Advances in Manufacturing Environment

 theory of constraints
- characterized as a “thinking process” that recognizes all sources as finite with some more critical than the others
- the critical limiting factor or the constraint is the focus of attention and is managed to improve performance

 just-in-time manufacturing
- a demand-pull system
- produce a product only when it is needed and only in quantities demanded by customers
- each operation produces only what is necessary to satisfy the demand of the succeeding operation

 computer-integrated manufacturing
- automation of the manufacturing environment that allows firms to reduce inventory, increase productive capacity, improve
quality of product and service, decrease processing time, and increase output

 customer orientation (value delivery)

- delivery of value to the customers with the objective of establishing customer loyalty
- the existing cost management system must track information relating to a wide variety of activities important to customers
such as product quality, environmental performance, new product development, and delivery performance

 new product development

- recognition of the effects of product development decisions on other parts of the value chain
- said recognition has produced a demand for more sophisticated cost management procedures such as
-
(i) target costing
 assessing the overall cost impact of product designs over the product’s life cycle
 provides incentives to make design changes to reduce costs

(ii) activity-based management

 identifies the activities produced at each stage of the development process and assesses their costs
 enables the identification of activities that do not add value and then eliminate them so that overall life cycle costs
can be minimized

 total quality management

 striving to create an environment that will enable firms to produce detect-free products and services
 continuous improvement and elimination of waste

 time management
 reduction of time to market by redesigning products and processes, by eliminating waste, and by eliminating non-
value added activities
 overall objective is to increase customer responsiveness
 efficiency
 providing important measures of efficacy where costs are properly defined, measured and accurately designed

Prior vs. contemporary business environment

Current scenarios:
  management in organizations has changed in response to changes in marketing and manufacturing
 emphasis has shifted from financial and profit-based measures of performance to customer-related, nonfinancial performance
measures such as: quality, delivery time, and service
 hierarchical command and control type of organization is replaced by a more flexible organization form that encourages
teamwork and coordination among business functions
 cost management practices include reports that are useful to cross-functional teams of managers and include a variety of
operating and financial information such as product quality, unit cost, customer satisfaction, and production bottlenecks
 the new business environment requires flexibility and adaptability and places greater responsibility in the hands of a more
highly skilled workforce.
 Changes tend to focus on factors outside the production of products or provision of service to the consumer

Comparison of Prior and Contemporary Business Environments:

Indicators Prior Contemporary

Manufacturing
- Basis of competition
- Manufacturing process
- Manufacturing technology
- Required labor skills
- Emphasis on quality
Marketing
- Products
- Markets
Management organizations
- Type of information recorded and
reported
- Management organizational structure
- Management focus
economies of scale
standardization
high volume; long production runs
significant levels of in-process and
finished inventory
assembly line automation
isolated technology applications
machine paced
low-level skills
acceptance of a normal or usual
amount of waste
relatively few variation
long product life cycles
largely domestic
almost exclusively financial data
hierarchical
command and control
emphasis on the short-term performance
measures and compensation
concern for sustaining the current stock
price
short tenure and high mobility of top
managers
quality
functionality
customer satisfaction
low volume
short production runs
focus on reducing inventory levels and
other non-value added activities
and costs
robotics
flexible manufacturing systems integrated
technology applications
connected by networks
individually and team-paced
high level skills
goal of zero defects
large number of variations
short product life cycles
global
financial and operating data
the firm’s strategic success factors
network-based organization forms
teamwork focus (employee with
more responsibility and control,
and coaching rather than
command and control)
emphasis on the long-term
focus on critical success factors
commitment to long-term success
of the firm including high and
stable shareholder value

Key components of a cost management system

1. Activity investment management

- evaluates the impact of changing an activity process
- the analysis process decomposes the company objectives and strategies into activity level goals
- facilitates measurement of the cost and non-financial performance impacts of the investment by defining base line set of
activities
- embraces the concept of continual improvement by routinely challenging how activities are performed
2. Cost driver analysis
- identifies activities that influence the cost and performance of subsequent activities
- eliminates the need for all subsequent activities by reducing or eliminating the event that trigger the first activity in the chain
3. Activity budgeting
- budgeting resources necessary to perform an activity by assessing the factors that control activity volume
4. Non-value added analysis
- identifies activities that can be eliminated without deterioration of enterprise performance (cost, function, quality, perceived
value)
- highlights wasteful activities
5. Best-practice analysis
- compares activity cost and performance between different departments, divisions, suppliers, and/or competitors to identify
the most efficient way to perform an activity
- results can be shared with other groups within the company to determine applicability to operations
6. Activity target cost analysis
- determines activity cost and performance goals based on market demand for a product
7. Activity strategic analysis
- uses activity cost and performance data to develop enterprise strategies
- evaluates a company’s activities from design to distribution, and determines here value to the customer can be enhanced or
costs lowered