Strategic Cost Management

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Strategic Cost Management
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Traditional Cost/Management Accounting

• Tools are
• Fixed vs. Variable cost
• B E P/Marginal cost
• Contribution/CVP analysis
• Flexible budget
• Standard Costing
• In all the above cases, change in cost is
  explained by output volume.

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Limitations of CCM

• Starts too late and ends too early
• Cost is considered to be mostly driven by volume

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SCM Three underlying themes

• Value Chain Analysis
• Cost Drive Analysis
• Strategic Positioning Analysis

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Strategic Cost Management
Identify Value Chain
Identify Cost Drivers
Develop Competitive Advantage
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Value Chain Analysis

• The value chain framework is a method for
  breaking down the chain - from basic raw material
  to end-use customers- into strategically relevant
  activities with the following objectives
• To understand the behavior of costs
• To identify the sources of differentiation

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VC for Computer- Manufacturing
Design
Material Acquisition
Assembling into components
Manufacturing
Distribution
Retailing
Customer Service
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Value Chain Analysis

• Value chain concept highlights four profit
  improvement areas
• Linkages with suppliers
• Linkages with customers
• Process linkages within the value chain of a
  business unit
• Linkages across business units

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Value Chain Methodology

• Identify the industrys value chain and assign
  costs, revenue, and assets to value activities.
• Diagnose the cost drivers regulating each value
  activity.
• Develop sustainable competitive advantage, either
  through controlling cost drivers better than
  competitors or by reconfiguring the VC.

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Identification of Value Chain

• The value chain dis-aggregates the industry into
  distinct strategic activities. Activities should
  be isolated and separated if
• They represent a significant of operating cost
• cost behavior is different or
• performed by competitors in different ways or
• have a high potential for creating
  differentiation

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Value ChainSome key questions

• Can we reduce costs in a particular activity,
  holding revenue constant?
• Can we increase revenues in a particular activity
  holding cost constant?
• Can we reduce assets in a particular activity,
  holding costs and revenue constant?

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Profit Pools Tool for VCA

• Profit-pool is the total profits earned in an
  industry at all points along the value chain.
• The pool may be deeper in some segments than
  others.
• Profit may vary within the segment
  Customer/Product/Area
• Profit concentration is often very different from
  the revenue concentration of the VC.

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Profit Pools Tool for VCA

• For example Automobile Industry Car
  manufacturing and dealers account for almost 60
  of the sales, however, leasing, and other
  financial products are the major profit earners.
• Ford has generated 50 of its profit from
  financing (though it accounted for less than 20
  of the revenues)

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Profit Pools Tool for VCA

• Define the pool
• Meaningful and Comprehensive
• Redefine industry
• Determine the size of the pool (Profit)
• Determine the distribution of profits
• Pure players and Mixed players
• 80/20 Rule
• Reconcile the profit

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Profit Pool What Profit?

• Accounting profit
• Return on Investment
• Economic Value Added
• Cash flow contribution PBDAIT (EBITDA)

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Internal Linkages

• Primary- primary Interdepartmental co-ordination
• Primary-support Computer-based operational
  systems
• Support-support Human resource development for
  new technologies

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External Linkages

• Vertical integration
• Specification and checking of suppliers/distribut
  or performance
• Total quality management working with
  suppliers/distributors
• Reconfigure value chain deleting activities
• Strategic alliances