Key elements in Strategic cost Management
There are three important components of strategic cost management:
- Strategic Positioning Analysis: It determines the company’s comparative position in the industry in terms of performance.
- Strategic positioning analysis is a method of researching what future environments may be like in your internal corporate structure as well as your external environment, and determining how you can use a variety of business strategies to move from your current situation to these desired goals.
- Analysis of the status quo often entails employing certain very typical strategic management instruments, such as:
- SWOT analysis: strengths and weaknesses inside your company; opportunities and threats in the external competitive market.
- Product/market matrix: Determine whether new markets, product modifications, product lines, or market variants may be beneficial.
- Portfolio analysis: Determine which of your ventures have the potential to be cash cows, stars, wildcats, or dogs.
- 2. Cost-Driver Analysis:Cost is determined by a variety of connected variables. In strategic cost management, cost drivers are classified into two types: structural cost drivers and executional cost drivers. It investigates, assesses, and explains the financial impact of the cost driver associated with the activity.
- Cost driver analysis is focused with identifying the true drivers of activity costs in your business. The most common method of analysis for this is activity-based costing (ABC), which seeks to identify which indirect causes may be linked to individual activities.
- This has implications for strategic cost management since cost drivers may be defined as both structural and executional cost factors.
- Structural cost drivers are strategic management decisions made by a firm regarding the real structure of its operations (size and scope), as well as the complexity of the goods and technology utilized. A more complicated working environment (products, technology, and manufacturing) translates into greater structural costs.
- Executional cost factors are related to the actual operational procedures and standards in place. The cost of executing tasks inside the organization is influenced by the efficient utilization of people, process layouts, just-in-time procedures, and other factors.
- 3. Value Chain Analysis: The process by which a company identifies and analyzes all of the activities and functions that contribute to the end product. It was proposed by Michael Porter (1985) to demonstrate how a customer value is assembled throughout the activity chain that leads to the final product or service.
- Value chain analysis is a method for determining the sequence of actions involved in producing and sustaining value within your company. It necessitates a methodical approach to assessing each aspect in both your main and support activities.
- The organization’s operations may be divided into main and support activities.
- Primary activities include inbound logistics, operations, outbound logistics, marketing, sales, and service.
- Support activities include procurement, technological development, human resource management, and business infrastructure.