Strategic Cost Management: Definition, Techniques, Strategy

Strategic Cost Management, presents a comprehensive coverage of modern cost management techniques to fulfil the needs of business organizations in the new competitive environment. This book provides a new framework to the vital issue of cost management, use of cost information to design a firm’s competitive strategy and provide enhanced value to customers, shareholders and other stakeholders. The book creates a logical linkage between the concepts and procedures and how these can be used in practice by business organizations. It discusses cost management techniques in detail and their role in strategic decision-making of a firm and building and sustaining competitiveness.

Defines strategic cost management in the following words:

“It (SCM) is cost analysis in a broader context, where the strategic elements become more conscious, explicit and formal. Here, cost data is used to develop superior strategies enroute to gaining sustainable competitive advantage….. A sophisticated understanding of a firm’s cost structure can go a long way in the search for sustainable competitive advantage. This is strategic cost management.”

Strategic Cost Management

Traditional costing is useful but having many limitations like :

  • Emphasis on short term decisions
  • Relay on Internal Information
  • Methods of Apportionment and Absorption is arbitratory
  • Reactive approach

Strategic Cost Management concern the focus of Cost Management efforts

  • Explicitly highlights strategic issues and concern
  • Uses both internal and external information for decision making
  • Cost structure use for search of best strategy
  • Aim for long term sustainable competitive advantage

Strategy – Michal Porter develop two important strategy – Cost Leadership & Product differentiate strategy

  • Cost Leadership strategy
  • Aims to lowest cost
  • Economics of scale
  • Tight cost control

Product differentiate strategy

  • Unique dimension in product / service
  • Innovative
  • Very high brand image
  • Luxury product / service

Take the example of Maruti and Mercidize car, how strategic cost management apply in these companies.

AreaCost Leadership (Maruti)Product Differentiate (Mercidize)
Standard Costing SystemVery high importantNot much important
Cost Control techniqueVery high importantModerate important
Innovation & ResearchNot much importantVery important
Strong market abilitiesNot much importantVery high important
Corporate reputationModerateVery high important
Product engineeringModerateVery high important

Strategic Cost Management Techniques

Some techniques of Strategic Cost Management which companies use

  • (1) Bundling – Bundling is the combination of two or more different product, which are offered as package at a single price. E.g. Bank offering Insurance services, Mutual Funds etc.
  • (2) Outsourcing – Instead of expansion or developing new line / operation, companies get it done from outsource e.g. many pharma companies getting production through contract manufacturing for its expansion or close-down several plant.
  • (3) Location advantage – Purchasing existing plant where employee cost is very low, Aman-MNC outright purchased existing plant in Gujarat of the similar products.
  • (4) Visioing Alliance – Very common strategic step. 7 O’clock merge in Gillette, many communication and Travel companies merged in bigger scale companies.
  • (5) TQM – Emphasis on Total Quality and continuous improvement in the product. Applying six sigma and reaching sixth level for minimize defects.
  • (6) Suppliers as a strategic partner – Many foundries become strategic partner of Engineering company and assured good quality material at cheaper rate and supply in critical time.
  • (7) Target Costing – Set the targeted price in future to earn desired profit in a stipulated time frame.
  • (8) Life Cycle costing – Considering cost of entire life cycle of product, instead of one or two years and accordingly develop and accept the technology and research work for a long term profitable survival.
  • (9) e. business – e business recently developed but its scope is very large and highly cost effectiveness and limitless boundary for business. Amazon is the best example.

Above and many more techniques are employed for long term sustainability competitive advantage instead of narrow cost sheet frame. In short Strategic Cost Management applying Strategic Management through Management Accounting perspectives.