3 Pillars of Strategic Cost Management in Any Business

Managing costs strategically within a business is a careful balancing act of accounting and corporate goals

by Rod Dunne on March 18, 2011

in Biz Dev, Creative, Innovation

Strategic cost management is an umbrella term used to define a form of analysis used primarily in manufacturing-based operations. Its goal is to save you money by making well-thought out business decisions and plan out your firm’s trajectory.

This type of executive level analysis tries to combine some of the concepts from business cost management techniques & management accounting with the more traditional corporate management concepts (such as strategic human resource (HR) management).

The reason it is an umbrella term is because it actually involves three different types of business analysis techniques; namely cost driver analysis, strategic positioning analysis and value chain analysis.

The fact that it incorporates three different analysis techniques adds to the complexity of the process, your operational choices and your well planned product design & development roadmap. But this should actually be seen as providing much richer results and more in-depth analysis of your manufacturing environment.

Pillar 1: Cost driver analysis

Cost driver analysis is concerned with determining what the actual drivers of activity costs are within your operations. The most popular type of analysis for this is activity based costing (ABC) which aims to establish what indirect causes can be related to specific activities.

For example, business cost management analysis may pinpoint that indirect costs such as maintenance actually driven by the number of machines or activities being performed per hour by your operations.

This has a bearing on strategic cost management since cost drivers can actually be determined by both structural cost drivers and executional cost drivers.

  • Structural cost drivers relate to strategic management choices the company undertakes in relation to actual structure of their operations (scale and scope) as well as the complexity of their products and technologies used. A more complex working environment (products, technologies and production) leads to higher structural costs.
  • Executional cost drivers relate to the actual operational processes and norms within operation. The effective use of staff, process layouts, just-in-time processes, etc. all have a bearing on the cost of executing activities within the firm.

These types of business cost management techniques and analysis approaches are nothing new. So understanding the connection between the strategic management decisions being made and how these affect costs requires careful analysis to establish where waste is occurring.

Pillar 2: Strategic positioning analysis

Strategic positioning analysis is an approach for researching what future environments might be like in your internal corporate structure as well as your external environment and determining how you can use the choice of business strategies to get from your current situation to these desirable goals.

The ultimate goal of this work is to ensure the continuity of the company.

Some of the questions these types of strategic management concepts are trying to answer include:

  • What are the opportunities and threats you can perceive in the current economic climate?
  • What is the future economic landscape like for your products, market and business?
  • What is the current state of your business?
  • How could the company be roughly positioned in the future landscape?
  • What systems need to be instigated in order to attain this future position?

Analysis starts with establishing what trends you can perceive. This means working out what technological/business opportunities or customer segments are altering which could turn into tomorrow’s big earners. This becomes important to strategic cost management since investment in new technologies or risky new ventures can be highly risky.

Analysis of the status-quo often involves using some fairly standard strategic management tools such as:

  • SWOT analysis – Strengths and weaknesses within your firm; opportunities and threats within the external competitive market.
  • Product/market matrix - Establishing what new markets, product changes, product lines or market variations could prove profitable.
  • Portfolio analysis – Establishing which of your projects are potential cash cows, stars, wildcats or dogs.

The meat of strategic positioning analysis is then deciding what strategies you want to choose for attaining specific goals or pursuing specific trends. Many companies consider stabilizing certain technologies, growing the company in specific areas or technologies, shrinking operations in specific technologies/products/markets or even doing a complete turnaround on ventures you’ve pursued.

This also has a bearing on your R&D innovation strategy, business development strategies, business/data intelligence strategy, communications strategy, etc. Obviously, there is a strategic cost management element associated with each decision you make which will have a bearing on the structural & executional costs.

In particular business cost management analysis will have to be completed to see how changes in your strategic direction are going to affect marketing plans, production plans, research work, personnel requirements, organizational structure, operational procedures, purchasing decisions, logistics, quality and public relations.

Designing, planning and communicating how costs are to be managed in line with business strategies

Pillar 3: Value chain analysis

Value chain analysis is an approach used to determine the series of activities involved in creating and building value within your operations. It requires a systematic approach to examining each different element in your primary activities as well as support activities.

The operations of the organization may actually be split out into both primary as well as support activities.

  • Primary activities: Inbound logistics, operations, outbound logistics, marketing & sales and service.
  • Support activities: Procurement, technology development, human resources management and firm infrastructure.

These have a bearing on strategic cost management since all of these activities have a bearing on operational, structural and executional costs. By making strategic decisions around your value chain you can actually determine the level of these costs.

Dealing with the complexity

There is overlap between these three different types of strategic cost management analysis techniques which can all relate back to your executional, structural and organizational costs. Each type of analysis is aimed at establishing where cost benefits can be achieved through strategic choices you make within the firm.

This is not a fine science but requires careful analysis of how strategic management concepts provide positive or adverse reactions to each element of your value chain, positioning decisions and cost drivers. The art in doing this is working out strategies which have the most preferential cost benefits.

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Author Rod Dunne...

Blog owner and sole writer Rod DunneI am the owner and sole writer on Product-ivity.com. This is my personal blog detailing troubleshooting tips for small businesses. Posts are based upon 2 decades in consultancy & innovation management within startups/maturing companies.

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