Strategic cost Management concept and Philosophy
Strategic cost management is the process of reducing total costs while improving The strategic position of a corporation. This aim may be achieved by gaining a deep grasp of which expenses strengthen a company’s strategic position and which undermine or have no influence. Subsequent cost-cutting measures should concentrate on expenses in the second group. In contrast, it may be advantageous to raise expenditures that support the company’s strategic position.
It is the practice of merging decision-making framework with cost information to strengthen the overall company strategy. It monitors and controls expenses to ensure they are in line with the company’s business plan.
Cost-cutting in strategically essential areas is virtually never beneficial since it diminishes the customer experience and, as a result, leads to a loss in revenue. As a result, management must be engaged in cost-cutting operations so that they may offer advice on how certain expenditures must be expended in order to maintain the firm’s competitive position.
Strategic cost management is an ongoing activity, since a firm’s strategy may change over time. Thus, some expenses may be unavoidable while one approach is adopted, but may be easily removed when the strategy changes.
Philosophies
In a nutshell, strategic cost management is the production of cost management data for strategic management purposes. Strategic cost management is described as “scrutinizing every process within your organization, breaking down departmental barriers, understanding your suppliers’ businesses, and assisting in the improvement of their processes.”
Michael Porter’s Competitive Advantage paved the path for a strategic focus on cost management by establishing a framework for determining a firm’s competitive strategy.
Porter’s notions of cost leadership and differentiation had a significant impact on management education. These notions serve as the foundation for the strategic approach to cost management by describing what a company should do to thrive.
Thus, Strategic Cost Management consists of two steps: first, identifying (using Porter’s framework) what managers must do to ensure the firm’s success, and second, developing cost management methodologies and procedures to support management’s efforts.
Need for SCM.
It is an upgraded kind of cost analysis in which the strategic aspects are more explicit and formal, hence improving the company’s overall position.
It is used to analyze cost data and generate alternative strategies for achieving a sustained competitive advantage.
It improves comprehension of the whole cost structure in the pursuit of a sustainable competitive advantage.
It particularly employs cost information to regulate the strategic management process, which includes formulation, communication, execution, and control.
It aids in discovering the cost link between value chain activities and their management processes in order to achieve a competitive edge.
Importance
Strategic cost management has been more important in recent years. Different cost drivers should be clearly defined when developing a plan to achieve the organization’s overall goals. Identification of major cost drivers allows businesses to concentrate on core operations that will account for about 90% of overall expenses.
In light of this, strategic cost management should not be overlooked. This indicates that an organization should implement an adequate framework of strategic cost management to cut expenses in key areas on which the business’s performance is primarily based. Strategic cost management is defined in several ways in the literature.
Objectives of Strategic Cost Management:
Strategic cost management offers a lot of advantages to various companies. It has helped the company get a better knowledge of its revenue streams.
(i) The firm may now examine the effectiveness of activity-based strategies at various levels to enhance cost management, including budgeting and process improvement.
(ii) Developed a methodology to assess resource allocation based on essential business operations and activities.
(iii) Improved awareness of cost drivers has resulted in more cost-effective strategic planning.