What is Strategic Cost Management?

Strategic Cost Management is an approach focusing on making a business more competitive by reducing costs of operations. More specifically, it integrates cost information into the decision-making structure as a means of reinforcing the organizations business strategy.

There are three important components of strategic cost management:

• Strategic Positioning Analysis - What is the company's competitive position in the market?
• Cost Driver Analysis - Identifying the activities generating costs in the organization. Costs are then divided into one of two categories: Structural Cost Drivers and Executional Cost Drivers. Each cost driver is measured and examined in terms of how the costs relate to or affect specific activities of the organization.
• Value Chain Analysis - The value chain analysis is the process of identifying how all organizational activities related to the final product or value proposition delivered to the customer or client.

Stages of Strategic Cost Management

After examining the organization structure, examining and categorizing cost drivers, and identifying the various aspects of the organizational value chain, Cost Management practices are implemented in Four Stages:

• Formulating Strategies - Identify methods for strengthening the organization's competitive position by reducing costs.
• Communication - Communicated these strategies throughout the organization.
• Execution - This includes identifying and executing tactics in furtherance of the identified strategies.
• Controls - Controls include developing methods of monitoring and measuring activities to gauge the effectiveness of strategies and execution.

Effect of Strategic Cost Management

• Allows for a better understanding of the cost structure when making management decisions.
• It improves upon traditional cost analysis measures by integrating organizational strategy.
• It relates costs to the various elements of the value chain.
• Uses specific metrics in furtherance of achieving competitive advantage through cost leadership.