Strategic cost management definition
/What is Strategic Cost Management?
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 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.
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Examples of Strategic Cost Management
Here are two examples of strategic cost management, each from the perspective of a different company strategy:
Fast turnaround strategy. The strategy of a manufacturing firm is to be able to offer rapid turnaround of customer orders by maintaining tight control over its bottleneck production operation. To do so, the company incurs extra costs to keep the bottleneck running 24x7. Expending extra funds here directly contributes to the profitability of the business. Conversely, cutting costs at the bottleneck operation will reduce the production capacity of the business and will have an immediate negative impact on its profits. From a strategic perspective, the company would do better to cut costs in non-bottleneck areas that are downstream from the bottleneck operation, since these cuts would have no impact on the delivery times quoted to customers.
Product line culling strategy. The strategy of another manufacturing company is to shift into a new market niche, abandoning an existing product line that has become commoditized. To do so, it completely eliminates the factory that was manufacturing the products for the old product line. This involves selling off existing inventories, auctioning the production equipment, and selling the building. In this situation, eliminating all costs associated with the old product niche is the strategy.
Process Flow for Strategic Cost Management
The process flow used in strategic cost management involves a structured approach to managing costs while supporting the overall strategic goals of the business. Here’s a typical process flow:
Identify business strategy. Understand the organization’s competitive strategy—cost leadership, differentiation, or focus—and align cost management efforts accordingly.
Analyze the value chain. Evaluate all activities involved in delivering a product or service, from raw material sourcing to after-sales service, to identify where value is added and costs are incurred.
Assess cost drivers. Identify the key factors that influence costs at each stage of the value chain (e.g., production volume, product design, supply chain efficiency).
Benchmark against competitors. Compare costs and processes with industry peers to identify best practices and areas for improvement.
Implement cost management techniques. Apply tools such as activity-based costing, target costing, or life-cycle costing to reduce or control costs without sacrificing value.
Monitor and review. Continuously track performance and adjust strategies to maintain cost efficiency while supporting long-term strategic goals.