Strategic Cost Management: Accounting & Control

COST MANAGEMENT
Accounting
Strategic & Control
Cost Management
Hansen▪Mowen▪Guan
Introduction
1
Study Objectives
1. Explain what strategic cost management is.
2. Discuss how strategic cost management can be used to help
a firm create a competitive advantage.
3. Define management accounting.
4. Explain the use of cost management information in each of
the four functions of management.
5. Describe the contemporary business environment.
6. Explain how contemporary business environment influence
cost management.
2
What is the essence of “strategy”
• : a careful plan or method for achieving a particular goal usually over
a long period of time.
• : the skill of making or carrying out plans to achieve a goal
-Merriam Dictionary
3
Planning and Control Cycle
Formulating Long-and Begin
Short-Term Plans
(Planning)
Comparing Actual Implementing

to Decision the Plans
Planned Performance Making (Directing and
(Evaluating) Motivating)
Measuring
Performance
(Controlling)
What is strategy nuanced to business
environment
Strategic decision making is
• choosing among alternative strategies with the goal of selecting a
strategy, or strategies,
• that provides a company with reasonable assurance of long-term
growth and survival.
• The key to achieving this goal is to gain a competitive advantage.
5
Strategic cost management
use of cost data to develop and identify superior strategies that will
produce a sustainable competitive advantage.
6
What is competitive advantage
• Competitive advantage is creating better customer value for the same
or lower cost than offered by competitors or creating equivalent value
for lower cost than offered by competitors.
7
What is customer value
• Customer value is the difference between what a
customer receives (customer realization) and what
the customer gives up (customer sacrifice).
• The total product is the complete range of tangible and intangible benefits
that a customer receives from a purchased product.
• Customer sacrifice includes the cost of purchasing the product, the time
and effort spent acquiring and learning to use the product, and post-
purchase costs, which are the costs of using, maintaining, and disposing of
the product.
8
Michael Porter’s Generic Strategies
9
Strategic Cost Management:
Basic Concepts
Three general strategies have been identified:
• Cost leadership
• Product differentiation
• Focusing
10
Generic strategies at a glance
Low cost Differentiation Focus

Low cost culture Adding value Niche markets
Economies of scale through Targeting
Eliminate -product features Limited territory
unnecessary costs -product quality Focus on a specific
Enjoy high profits -distinctive offering group of customers
through cost Offer something Either cost leader
advantage new or different or differentiation
High costs but with in the segment
charge premium
price
Basic Concepts
Cost leadership strategy
To provide the same or better value to customers at a lower cost
than offered by competitors.
Cost reduction provides the focus of the organisation’s strategy
Competitive advantage is achieved by driving down costs
A company might redesign a product so that fewer

parts are needed, lowering production costs and the
costs of maintaining the product after purchase.
12
13
A misconception
• Cost leadership is often seen as a strategy that aims to attract
customers with low prices that are made possible by low costs
• But cost leadership does not necessarily mean selling at the lowest
price
• It might mean selling at the industry average price but enjoying above
average profits through low cost production
• The low costs result in high profit margins
Five forces and cost leadership
The five forces The cost leader is
Entry barriers Able to cut prices to discourage potential

entrants to the market
Buyer power Able to offer a competitive price to buyers
with power
Supplier power Protected from a powerful buyer by low
costs
Threat of Able to make use of low price as defence
substitution against substitutes
Rivalry Is better able to compete on price
Basic Concepts
Differentiation strategy
Strives to increase customer value by increasing what the customer receives
(customer realization).
Gaining a competitive advantage by making their product different from
competitors
Competing on the basis of value added to customers
Persuading customers that the firm’s product is superior to that offered by rivals
Customers being willing to pay a premium price to cover higher costs
A retailer of computers might offer on-site repair

service, a feature not offered by other rivals in the local
market 16
Sources of differentiation
• Creation of strong brand
• Superior performance
• High quality
• Additional features offered
• Innovation in packaging
• Speed of distribution
• Higher service levels
• Greater flexibility
• Delivery
• Quality of the materials
18
The five forces and differentiation
Five forces A firm pursuing a differentiation strategy…

Entry barriers Benefits from customer loyalty which discourages
potential entrants
Buyer power Enjoys some protection since large buyers have

less power to negotiate because of the absence of
close alternatives
Supplier power Is better able to pass on supplier price increases
to customers
Threat of Is protected from the threat of substitutes by

substitution customer loyalty
Rivalry Benefits from brand loyalty to keep customers

from rivals
Basic Concepts
Focusing strategy
A firm selects or emphasizes a market or customer segment in which to
compete.
The firm might feel more secure in the niche with greater insulation from
competition
A focus strategy means that the firm’s efforts are not spread too thinly
Focus strategies are
Cost focus: cost leader in a particular segment
Focus differentiation: differentiation in the chosen segment
20
COST FOCUS FOCUS DIFFERENTIATION
21
The five forces and a focus strategy
The five forces A firm pursuing a focus strategy…

Entry barriers Develops core competencies that can act as an entry
barrier
Buyer power Enjoys some insulation since large buyers have less
power to negotiate because few alternatives are
available
Supplier power Is better able to pass on supplier price rises thereby

reducing the impact of supplier power
Threat of substitution Enjoys some protection against substitutes by

specialised products and core competencies
Rivalry Enjoys some protection because rivals cannot meet

differentiation focused customer needs
Stuck in the middle
• Porter argued that a firm must make a conscious choice about the
competitive advantage it seeks to develop
• If it fails to choose one of these strategies,it risks being “stuck in the
middle”,trying to be all things to all people,and ends up with no
competitive strategy at all
• Being stuck in the middle leads to low profitability
• Competitors with a clear strategy outperform those whose strategy is
unclear or attempt a combination of strategies
What is wrong with being “stuck in the middle”?
• It is difficult to simultaneously become differentiated and low cost

• The firm loses out to others able to undercut it and to those able to
offer a superior product
• If a firm differentiates itself by supplying very high quality products it
risks undermining that quality if it seeks to be come a cost leader
• Such a firm also suffers from a blurred corporate culture and the
projection of a confusing image
Generic strategies: summary
Cost leadership
Being the lowest cost producer in the industry as a whole
Differentiation
The exploitation of a product or service which is believed to be unique
Focus
Restricting activities to only part of the market through:
Providing goods or services at lower cost to that segment (cost focus)
Providing a differentiated product or service to that segment (differentiation
focus)

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COST MANAGEMENT

Comparing Actual Implementing

Low cost Differentiation Focus

A company might redesign a product so that fewer

Entry barriers Able to cut prices to discourage potential

A retailer of computers might offer on-site repair

Five forces A firm pursuing a differentiation strategy…

Buyer power Enjoys some protection since large buyers have

Threat of Is protected from the threat of substitutes by

Rivalry Benefits from brand loyalty to keep customers

The five forces A firm pursuing a focus strategy…

Supplier power Is better able to pass on supplier price rises thereby

Threat of substitution Enjoys some protection against substitutes by

Rivalry Enjoys some protection because rivals cannot meet

• It is difficult to simultaneously become differentiated and low cost

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