Strategic Cost Management

Cost is a strategic issue. Strategic cost management looks at cost a strategic issue and it considers or evaluates the effect of cost on strategic objectives of the company.

Authors

• Narayana Rao

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Version 7

Last edited: 20 Aug 2009

Exported: 26 Nov 2011

Original URL: http://knol.google.com/k/-/-/2utb2lsm2k7a/204

Cost is a strategic issue

In today's competitive environment the most efficient companies view all of their spend (direct and indirect) as an investment; they make smart spending decisions based on a strategic vision and their internal capability to deliver value from that investment.

Cost is a strategic issue (PWC). It needs to be continuously optimised in the context of the entire business model of the organisation. Often, the very business model itself may need to change to ensure the organisation remains competitive.

In addition, execution of any chosen strategy has to be carefully managed to ensure the appropriate balance between revenue growth and cost.

Companies that are taking the investment approach to managing cost are thriving in this new environment, striking a balance between a competitive cost structure, cost effective strategic execution and investment in the future. They are delivering a robust response to the cost challenge.

Strategic cost management looks at cost a strategic issue and it considers or evaluates the effect of cost on strategic objectives of the company. In contrast cost management was defined as a system that identifies how management’s decisions affect costs (Horngren, Sundem, Stratton, 1999).

PWC Consultants clarified the activities that come under strategic cost management by identifying three major areas and the activities under each major area.

The three major areas are:

1. Creating a competitive cost base

2. Cost effective strategy execution 

3. Continuous improvement

Creating a competitive cost base

    Keep cost under continued observation through targeted key performance indicators.
  Know current best practice and regularly benchmark the cost base against competitors.
  Have effective decision-making processes at the operational level through stringent cost accounting.
  Execute periodic, tightly focused tactical cost reduction projects under an effective project management discipline.
  Ensure compliance through strict governance and robust supplier management.
  Understand net profitability by customer, product, market and channel.
 

Cost effective strategy execution

  Continually challenge the business model to shape investment choices.
  Analyse key cost data to show the cost implications of new opportunities, products and customers.
  Ensure poor areas of customer and product profitability are understood and continually addressed.
  Ensure that growth is funded through cost efficiency.
  Robustly track the execution of strategy against plans and manage performance.
  Embed a culture of cost consciousness in the organisation but invest in those areas that will deliver the greatest return.
Continually strive to improve and apply incentive mechanisms to drive sustainable improvement.
 

Continuous improvement

  Actively track the customer experience and market place, being able to effectively assess the costs of responding appropriately to changes.
  Review the external environment for different cost effective methods or business models.
  Be alert to potential market entrants from any area, recognising that lower cost competition can arise from different industries and competitiveness can be enhanced by adapting cost structures from other industries.
  Constantly challenge operational costs to drive investment in critical research and development.
  Continuously monitor complexity throughout the business, constantly simplify execution whilst enhancing service delivery.
  Recognise that employee satisfaction and performance drives financial success and structure rewards accordingly.
  When you combine a competitive cost base and a competitive business strategy with cost-focused future planning, you are seeing truly best practice cost management.

References

PWC, http://www.pwc.co.uk/eng/issues/strategic_cost_management.html

PWC,   http://www.pwc.co.uk/pdf/pwc_strategic_cost_mgt_sep07.pdf

 Horngren, Charles T., Sundem, Gary L. and William O. Strattion, Introduction to Management Accounting, Prentice Hall, Enlgewood Cliffs, 1999, p. 144.

Other Documents for Further Study:

http://www.investbrisbane.com.au/Brochures/KPMG_GuideToSurvivingTurbulentTimes_2009.pdf

The document has two pages devoted to strategic cost management during the downturn.

http://kpmg.com.au/Portals/0/Strategic_Cost_Management_1208.pdf

More detailed write up on strategic cost management by KPMG. Includes a brief writeup on case study also.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1357746

Strategic Cost Management in Supply Chains, Part 1: Structural Cost Management  by Shannon W. Anderson and Henri C. Dekker. To be published in Accounting Horizons, 2009.

Strategic Cost Management - Part 1  ASA (South Africa)
http://www.accountancysa.org.za/resources/ShowItemArticle.asp?ArticleId=1175&Issue=800

Strategic Cost Management - Part 2
http://www.accountancysa.org.za/resources/ShowItemArticle.asp?Article=Strategic+Cost+Management+-+Part+2&ArticleId=1192&Issue=819

Strategic Cost Management - Part 3
http://www.accountancysa.org.za/resources/ShowItemArticle.asp?Article=Strategic+Cost+Management+-+Part+3&ArticleId=1205&Issue=821

Phd Thesis on 

Towards a conceptual framework for strategic cost management
- The concept, objectives, and instruments -
Chemnitz University of Technology
Ibrahim Abd El Mageed Ali El Kelety
2006
Full Thesis: http://www.qucosa.de/fileadmin/data/qucosa/documents/5228/data/Title_250706.pdf