3 Key Concepts of Strategic Cost Management

Summary

In this video, Teacher Ann explores the key concepts of strategic cost management, focusing on cost driver analysis, strategic positioning analysis, and value chain analysis. She explains how understanding cost drivers helps managers predict and control costs, both through traditional and strategic lenses. The importance of strategic cost management is emphasized through various methods for identifying cost drivers, such as analyzing internal experience and competitive cost analysis. Additionally, Ann highlights how value chain analysis can improve a company’s competitive position by eliminating non-value-adding activities and optimizing primary and secondary processes.

Takeaways

• 😀 Cost driver analysis helps identify the factors that cause costs to incur, which can be managed to improve cost efficiency.
• 😀 A cost driver is an activity or event that influences the costs of a business, and understanding it allows managers to predict how costs will behave under different circumstances.
• 😀 Traditional cost drivers are mainly focused on production activities, such as output volume and plant size, while strategic cost drivers consider a broader range of factors, including competitive environment and long-term cost positioning.
• 😀 Strategic cost management requires companies to go beyond just production costs and look at the entire value chain to improve competitive positioning.
• 😀 Michael Porter's value chain theory emphasizes that a company's cost advantage comes from lowering the cumulative costs of value activities, such as procurement, production, and service delivery.
• 😀 Identifying cost drivers involves examining basic economics, internal company experience, expert interviews, and competitive cost analysis to get a complete understanding of cost behavior.
• 😀 Strategic positioning analysis evaluates a company's relative position in the industry and how it can create value differently from competitors.
• 😀 To assess a company’s strategic position, tools like PESTEL (Political, Economic, Social, Technological, Environmental, and Legal) and SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) are used.
• 😀 Value chain analysis helps companies identify value-adding activities and eliminate inefficiencies, allowing them to focus on processes that deliver the most value to customers.
• 😀 The primary activities in a value chain include inbound logistics, operations, outbound logistics, marketing, sales, and after-sales service, all contributing to creating customer value.
• 😀 Support activities in the value chain, such as procurement, technology development, human resources, and infrastructure, play a crucial role in supporting primary activities and improving overall efficiency.

Q & A

What is the definition of a cost driver in the context of strategic cost management?

A cost driver is a characteristic of an activity or event that causes that activity or event to incur costs. It can be more or less under a firm's control and represents a cause-and-effect relationship between changes in activity levels and changes in total costs.

Why is it important for an organization to understand its costs?

Understanding costs allows managers to predict how costs will respond to management actions, helping them make informed decisions about products, processes, and resource allocation. It enables better planning, performance evaluation, and cost control.

What is the difference between traditional and strategic views of cost drivers?

Traditional views focus on production activities and manufacturing costs, while strategic views emphasize the whole value chain and long-term cost position. Strategic cost drivers consider broader factors, such as external business environment and strategic positioning, not just output volume.

What are the two categories of cost drivers according to Shank and Govindarajan?

Shank and Govindarajan categorize cost drivers into 'structural cost drivers' and 'executional cost drivers.' Structural cost drivers involve strategic choices such as economies of scale and technology, while executional cost drivers relate to operational efficiency, workforce involvement, and plant layout.

How can organizations identify key cost drivers?

Organizations can identify key cost drivers by examining the basic economics of activities, reviewing internal experience and historical cost data, conducting interviews with experts, and performing competitive cost analysis.

What are the primary activities in a value chain analysis?

The primary activities in a value chain analysis include inbound logistics (receiving and distributing materials), operations (transforming inputs into products), outbound logistics (distributing products to customers), marketing and sales (promoting and selling products), and service (after-sales support).

What is the role of secondary activities in value chain analysis?

Secondary activities, also known as support activities, are not directly involved in product creation but support primary activities. These include procurement (purchasing raw materials), technological development (improving processes and products), human resource management (recruitment, training), and firm infrastructure (finance, planning, legal).

How does strategic positioning analysis help in understanding a company's competitive advantage?

Strategic positioning analysis helps determine a company's relative position within its industry by assessing internal and external factors, such as organizational values, resources, culture, and environmental influences. This analysis helps ensure that the company’s strategy aligns with its competitive positioning.

What is the significance of Porter's value chain in cost driver analysis?

Porter's value chain emphasizes that the firm's cost position is influenced by the activities performed in each step of the value chain. By optimizing these activities, firms can reduce costs and achieve a competitive advantage by outperforming rivals in performing value activities.

What are the benefits of determining cost drivers in strategic cost management?

Determining cost drivers provides relevant and meaningful information that helps organizations improve their cost position. It allows firms to identify activities that influence costs, focus on key processes, eliminate non-value adding activities, and improve their competitive positioning.