Ministry of Higher Education & Scientific Research

Erbil Polytechnic University

Erbil Administrative Technical College

Department: Technical Business Management

Stage: 4 - B

Managerial Accounting
Strategic Cost Management

Supervisor:

Dr. Nawzad Majeed

Prepare:

Sarwar Saman

2022-2023

Table of Contents
Introduction.....................................................................................1
What is Strategic Cost Management?.............................................2

Definition of Strategic Cost Management....................................2

Purpose of Strategic Cost Management.......................................2

Implementation stages of strategic cost management.....................3

Analysis of the value chain..........................................................3

Analysis of strategic situation......................................................3

Analysis of drivers of structural and executory cost....................4

For which sectors is it essential?.....................................................5

What you need to know about Cost Reduction Analysis................5

Five Steps in Cost Reduction..........................................................6

1. Start with strategy....................................................................6

2. Align costs to strategy..............................................................6

3. Aim high...................................................................................6

4. Set direction and show leadership............................................7

5. Create a culture of cost optimization........................................7

References.......................................................................................9
 Introduction

Strategic Cost Management is a systematic approach to reducing costs and

improving financial performance in an organization. It involves analyzing
and managing costs in a manner that aligns with the company's overall
strategy and goals. The purpose of strategic cost management is to ensure
that an organization uses its resources efficiently and effectively, while
maintaining its competitiveness in the market.

The importance of strategic cost management cannot be overstated in

today's business environment, where companies are facing increasing
pressure to reduce costs and improve profitability. By implementing a
strategic cost management process, organizations can improve their
financial performance, increase competitiveness, enhance customer value,
and make better decisions.

This report provides an overview of the key concepts, techniques, and

tools of strategic cost management. It also discusses the challenges of
implementing a strategic cost management process and the benefits that
can be achieved through its successful implementation. The report
concludes with a summary of the key findings and recommendations for
future research.

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 What is Strategic Cost Management?
Strategic cost management is the process of reducing total costs while improving the strategic
position of a business. This goal can be accomplished by having a thorough understanding of which
costs support a company's strategic position and which costs either weaken it or have no impact.
Subsequent cost reduction initiatives should focus on those costs in the second category.
Conversely, it may be useful to increase costs that support the strategic position of the business.

It is almost never worthwhile to cut costs in strategically important areas, since doing so reduces the
customer experience and therefore will eventually lead to a decline in sales. Consequently,
management needs to be involved in cost reduction activities, so that they can provide input
regarding how certain costs must be incurred in order to support the competitive position of the
firm.

Strategic cost management is a continuing process, since the strategy of a firm may change over
time. Thus, certain costs may be sacrosanct when one strategy is being used, but can be readily
eliminated when the strategy shifts.

Definition of Strategic Cost Management

Strategic Cost Management is the process of identifying, analyzing, and controlling the costs
associated with an organization's products, services, and operations, with the goal of aligning these
costs with the organization's overall strategy and goals. It involves evaluating the entire value chain
of an organization, from procurement to production to delivery, to identify areas where costs can be
reduced, while still maintaining quality and customer satisfaction. The aim of strategic cost
management is to make the most efficient use of resources and to support the organization's long-
term competitiveness and financial performance.

Purpose of Strategic Cost Management

The purpose of Strategic Cost Management is to improve the financial performance of an

organization by reducing costs and increasing efficiency. The key objectives of strategic cost
management include:

1) Aligning costs with the organization's overall strategy and goals: By identifying areas where
costs can be reduced and making cost-saving decisions that align with the organization's
strategic objectives, strategic cost management helps to improve financial performance and
competitiveness.
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2) Improving efficiency and effectiveness: Strategic cost management helps organizations to
streamline processes, reduce waste, and optimize the use of resources, leading to increased
efficiency and effectiveness.
3) Making informed decisions: By analyzing cost information, strategic cost management provides
the data and insights needed to make informed decisions about cost management and to evaluate
the impact of these decisions on the organization's financial performance.
4) Enhancing customer value: Strategic cost management can help organizations to reduce costs
without sacrificing quality or customer satisfaction, which can improve customer loyalty and
increase market share.
5) Maintaining competitiveness: By reducing costs and improving financial performance, strategic
cost management helps organizations to maintain their competitiveness in the market and to
remain attractive to customers, shareholders, and employees.

Implementation stages of strategic cost management

Implementation stages of strategic cost management include value chain analysis, strategic situation
analysis and analysis of structural and administrative costs drivers.

Analysis of the value chain

Value chain analysis is an instrument for strategic analysis that helps companies to better
understand the competitive advantage. Value chain analysis focuses on the whole value chain of the
product from design to production and after-sales service. The basic concept of analysis is that by a
thorough examination of each of the activities in the value chain, one can reveal the activities that
the companies have the highest or lowest success in them from competition perspective, and plan
accordingly.

Analysis of strategic situation

At this stage, the company determines its potential and current competitive advantage by examining
valued activities and cost drivers which have been specified in the previous stage. Companies which
have competitive strategy of cost leadership are strongly trying to reduce their costs to the level of
cost of cost leadership. Cost leadership focuses on cost reduction only as far as it makes sure that it
is the leader in price and the holder of the lowest cost in the market. Reduction of costs is usually
done by increasing productivity in the production process, distribution or general and administrative
expenses. In this management strategy, maintaining stability is a priority and the company is not
looking for innovation and risk-taking, but is looking for offering products and services at
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competitive prices. In contrast, competitive strategy of differentiation, allows the companies to raise
the price of products higher than that of their competitors and without significant reduction in costs,
have high profitability. These companies, by creating differentiation between the products and
creating new features, make customers willing to pay a reasonable price as a result of this
differentiation. Using the product differentiation strategy, one can reduce the intensity of
competition and no threat of product substitution happens for the manufacturer, because all
customers become loyal to the brand of the product.

Analysis of drivers of structural and executory cost

Strategic Analysis of cost drivers helps companies in improvement of their competitive situation.
Drivers of structural and executory cost are used to facilitate operational and strategic decision-
making.

1. Driver of structural cost, has strategic nature because it includes programs and decisions
which have long-term effects.
2. Scale: For example, a retail company shall determine the number of new stores it opens
during the year in order to achieve the strategic goals and competitive success.
3. Technology: New technologies can significantly reduce the company costs. For example,
some manufacturing companies in developed countries use computer technology to show
number of products that their customers use (especially large retailers), so that whenever the
customers run out of the inventory in the warehouse, they send for them quickly.
4. Complexity of products: companies that produce a high variety of products, have high cost
of planning and management of production and also high distribution costs and after-sales
service. Such companies usually use activity-based costing to determine the degree of
profitability of their products.
5. Administrative cost drivers, are the factors that companies can manage them in the short
term through operational decisions to reduce costs. These factors include:
6. Work commitment: work commitment causes reduction in costs. The companies in which
there is a strong correlation between the employees, can significantly reduce their operating
costs.
7. Design of Production process: the sequence arrangement of equipment and the frequency
of processes lead to accelerating the production process in the company. Production
technology innovations can significantly reduce costs.

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 8. Relationships with suppliers of raw materials of the company: the companies can reduce
their costs significantly through agreements with suppliers of raw materials on quality,
delivery time and other characteristics of their required raw materials.

For which sectors is it essential?

Clearly, strategic cost management as a competitive advantage is a reality for sectors that have high
and expressive competition, because any productive bottleneck, failure or waste, however small,
can be disastrous and make the survival of an organization unfeasible.

In this scenario, we highlight the commodities segment – the one that takes care of all the raw
material that originates in the primary sector. Because they are traded on the stock exchange and are
of great importance to the economy and the financial sector, the prices practiced by companies in
this area are determined by the market. This is because they need to aim for increased profitability.

It is exactly the opposite for businesses that are not part of this sector, which set prices by their own
criteria and, mainly, due to marketing strategies, have influence on consumption. Good examples
are cell phone brands and clothing.

Therefore, the main difference for the success and competitiveness of the commodities segment is
exactly a strategic cost management that is well structured and has the engagement of teams and
managers, since no company grows alone and without an excellent administration.

In addition, large investors and corporations study a company’s management strategies before
investing in it because they know that cost management says a lot about the health of the business,
and that even if the organization goes through troubled times, this measure is able to eliminate
bottlenecks and waste in a timely manner.

As a manager, you should view the strategic cost management as a competitive advantage in
companies and as a tool that guarantees not only the control of your value chain, but also waste and
failures, as these are aspects that influence the health and image of your business.

It is impossible to have cost management without efficient software in your company. So contact us
and learn about our technological solutions to control this strategy.

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 What you need to know about Cost Reduction Analysis
Cost reduction analysis is the process used by companies to reduce their costs and increase their
profits. The strategies of different companies vary according to the products or services that they
offer. Every decision made in the product development process affects the costs.

Five Steps in Cost Reduction

Many cost optimization programs failed in delivery or acceptance. There are some products that
regardless of how the costs are cut, the returns are still not viable, either because customers do not
see their value or there is always another company that can offer them cheaper or free opportunities.
The main focus of cost reduction analysis is on value potential instead of cost or volume. There is
also the point where the winning costs have been accomplished, leaving plenty of far-reaching
choices on the horizon. The wins may mean withdrawing from non-viable markets, elimination of
certain processes through automation, and a need for a significant shift in the business model.
Making the correct choices and ensuring business success needs a rethinking of strategy and to see
if they will align. The five steps focus on optimization instead of merely cutting value to help and
ensure that the business is competitively relevant while maximizing the potential.

1. Start with strategy

The cost reduction analysis should start with a clear picture of the strategy to make sure that there is
a consistent understanding of the organization. A cost reduction analysis cannot be carried out if the
business strategy is not fully understood because it may not be clearly defined. The entire
organization should be on the same page with regards to its business strategy, otherwise, any
attempt by one unit to institute cost reduction will not be understood and will not gain any help and
support from the other units.

2. Align costs to strategy

The cost reduction analysis should look across the whole organization, differentiating the critical
good costs from the non-essential bad costs. If the strategically-critical good costs are necessary to
maintain the high quality of the products or the services, they should not be touched. It should be

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the non-essential bad costs that should be reviewed for possible reduction or, when necessary,
elimination.

3. Aim high

Aim high when working on new ways to radically optimize the cost base. The company can be
bold, creative, and brave in the use of innovation and technology to help you find ways of reducing
value that will make the product or service competitive while at the same time maintaining its high
quality.

4. Set direction and show leadership

The manager who is tasked to do the cost reduction analysis must deliver cost optimization as a
strategic, business transformation program. Cost reduction should not be a short-term thing that will
be abandoned when working with another product. The cost reduction program should be a
company-wide endeavor that is aimed to transform the way business is conducted.

5. Create a culture of cost optimization

Ensure that cost optimization will be embedded as a culture of ownership and incentivize
continuous improvement even if it means for free. The need to search for ways to reduce costs must
be part of the company culture that should trickle down from the top management to the workers on
the production floor. Everyone should be looking for ways to cut costs while ensuring that the high
quality is maintained all the time. It will make the company’s products popular with consumers as
they are highly competitive at the same time. The main priority in making cost reduction is the
targeting of resources in areas where they earn the best return, instead of simply cutting the value in
itself. The start point is the differentiation of the capabilities required to spur profitable growth from
low-yielding processes and inefficient techniques. Good costs are capabilities that will differentiate
your business, move it closer to the customer base, and allow it to develop high-value propositions.
Identifying and focusing on things that matter to customers in the current market will ensure the
success of your cost reduction strategy.

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 Conclusion

In conclusion, Strategic Cost Management is a process of reducing costs

and improving the strategic position of a business by aligning costs with
the organization's overall strategy and goals. This process involves
analyzing the value chain, strategic situation and cost drivers to identify
areas for cost reduction and optimization. The purpose of Strategic Cost
Management is to improve the financial performance and competitiveness
of an organization by making informed decisions, reducing costs and
waste, enhancing customer value, and maintaining competitiveness.

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 References

1. https://www.accountingtools.com/articles/strategic-cost-management.html

2. https://fbj.springeropen.com/counter/pdf/10.1186/s43093-021-00079-4.pdf?pdf=button
%20sticky .PDF

3. https://myabcm.com/strategic-cost-management-as-a-competitive-advantage-in-companies-
learn-about-it/

4. https://thebottomlinegroup.com/cost-reduction-analysis/#:~:text=The%20cost%20reduction
%20analysis%20should%20look%20across%20the%20whole%20organization,they
%20should%20not%20be%20touched.