Chapter 1: What is Strategic Cost Management? Why it is important?
When it comes to managing a company’s finances, strategic cost management has become essential. Businesses are giving importance to SCM to cut costs without impacting the quality of the business.
In this chapter, we will demonstrate what is strategic cost and management and why is it important.
1. What is strategic cost management? What are its main uses of it?
It refers to the concept of decreasing business costs, in the meantime, it can refine the quality and strategic position of the business.
Many companies use techniques and strategies to improve their business position and cut or reduce unnecessary costs.
The company must determine which costs have a significant impact on its strategic positioning and which have little or no impact.
Simply put, if a cost helps a company’s strategic positioning, that cost can be increased to improve the positioning. On the other hand, if a cost has little or no influence, the corporation can employ a cost-cutting plan.
The main purpose of SCM is to aid the company to get a sustainable competitive advantage over its competitors.
It assists the company in analyzing cost information and gaining a better understanding of the cost structure.
2. Traditional cost management vs. Strategic cost management
Compare with traditional cost management, strategic cost management focuses more on gaining a competitive advantage and providing high-quality products to customers.
It also prioritizes client contentment and satisfaction with product quality. It focuses on the company’s core functions like product development, strategy planning, and research and development to form the strategy.
SCM primarily focuses on where the cost-cutting techniques should be applied. If a company reduces the cost of the main business area, then, it can affect the overall quality and sales of the product.
This will end in a loss, that’s why SCM emphasis selecting a cost-cutting area that has little to no impact on the overall business.
On the other hand, traditional cost management does not primarily focus on the strategic aspect of the business.
With traditional cost management, business and product quality suffers in the process.
Also, reducing costs might affect the business’s product quality and strategic position in traditional cost management.
3. Why strategic cost management is important for your business?
Strategic cost management is the need of the hour in the highly competitive business world. Strategic management can help the decision-maker of the company make an effective decision using strategies and management tools.
SCM is crucial in today’s world, it helps the company to innovate with time and gain a competitive advantage over its competitors. It gives the company a clearer idea of the company’s goals, strategic objectives, and a better analysis of changing conditions.
4. 3 Main components of strategic cost management
Following are 3 major components of strategic cost management.
Strategic Positioning Analysis
Strategic positioning analysis is a parameter to analyze the market position of the company based on its performance.
Cost Driver Analysis
Cost drivers are generally divided into two subcategories, executional cost drivers and structural cost drivers. Cost driver analysis helps the company analyze the effect of the cost drivers on business activities.
Value Chain Analysis
Value chain analysis helps the company to understand and examine all the activities that ultimately result in the final products.
It determines how the value chain eventually results in providing the final product to the customer. Each step and activity in the activity chain contributes to providing the consumer the desired value.
5. Do we need to compromise the product’s quality and overall position of the business in strategic cost management?
Today, many companies are using strategic cost management to improve their business and product quality.
Unlike traditional cost management, strategic cost management helps the companies to reduce the cost without compromising the product’s quality.
It helps the company to gain a competitive advantage and to improve the overall strategic position of the business.
For example, if a company’s production unit is becoming a bottleneck for other operations, it can cause a serious problem and affect the whole supply chain process of the company.
The company can manage this problem by increasing the cost of production. This will increase the production speed and help in better management of the overall supply chain management of the company.
Chapter 2: The 5-Step Process for Strategic Cost Management
Companies can use various strategies to implement strategic cost management in their company. In this chapter, we have provided 5 main steps of the strategic cost management process.
1. Planning and formulating business cost strategies
First of all, start with critically reviewing all the current strategies of the business. A critical review of all the current strategies will help the company to figure out the gaps between the current strategies.
Once, you have identified the shortcoming of the current strategies, then move on to make required changes and innovations in the current strategies.
Proper planning is also a crucial aspect of making the business cost strategies. The manager should focus on setting up a proper structure for all the business activities.
All the important business activities and their impact should be considered while making the business cost strategy.
2. Communication of strategies with the other members of the organization
Once the manager has formulated the strategies, then the next step is to communicate all the strategies with all the other members of the organization. This way all other members will have a clearer idea of the change in the strategy.
Everyone in the team should understand the reason and process of all the strategies, because only when they know why to do and what to do, they can stay at the same level. Then the developing speed of the company can be as fast as it was ex