Strategic Cost Management

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Paramjit Sharma

Cost Management and Strategy:Cost Management and Strategy: an overviewan overview

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Wal-Mart Story

Grown from a discount store in 1962 to become world’s largest Retailer

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Constant focus on Customer ServiceExtensive use of technologyManagement Structure that welcome changeOpportunity Oriented ManagementExtensive effort to Grow business GloballySetting Ambitious GoalsSales from $44 billion in 1992 TO $312 billion in 2006

How did it happen?

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Paramjit Sharma

the wall mart story-one instance

Now, I want you to raise your right hand…… I want you to repeat after me:

from this day forward I solemnly promise and declare

that every time a customer comes within 10 feet of me

I will smile,

Look at him in the eye and greet him,

I am Sam May I help You

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the wall mart story

Success

Mission Strategy

a firm must define clearly what it means bySuccess in its mission Statement

Then it must develop a road map to accomplishthe mission which we callstrategy

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Wal-Mart"To give ordinary folk the chance to buy the same thing as rich people."

Mission Statement of Wal-Mart

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Success Comes from developing & implementing an effective Strategy aided by Management Accounting Methods

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Wal - mart could not have achieved success without Strategic Cost Management

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1 Use of Cost Information in 4 Managerial functions2 Strategic Management & Strategic Cost Management3 Contemporary Business Environment- influence on CM4 Strategic Focus on Cost Management5 How a firm succeed- competitive cost management strategy5 Developing Competitive Strategy for Success

Scope of The Session

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1 Use of Cost Information

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concept of cost management information

The most successful man in life is the man who has the best information Benjamin Disraeli, a 19th Century PM of England

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concept of cost management information

The most tradeable item in the 21st century would be data & the information Paul Kennedy Preparing for the 21st century

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What Information may be required by an organisation to manage Cost? & What may be their uses?

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the uses of cost management system

CMI is the information the manager needs to effectively manage the firm and includes both financial, about costs and revenues, as well as relevant non financial information about productivity,quality and other success factors for an organization

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CMI

Usefulness&

Timeliness

CMI

Accuracy &Compliance

FMI

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4 functions of Management

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StrategicManagement

Planning &DecisionMaking

Management &

OperationalControl

Preparationof

FinancialStatements

4 functions ofManagement

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StrategicManagement

functions ofManagement

A strategy is a set of goals and specific Action plans that, if achieved, provide

the desired competitive advantage

SM involves identifying and implementingthese goals and action plans

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Planning &DecisionMaking

4 functions ofManagement

It involves budgeting, profit planning, cash flow,others decisions related to firm’s operations, such as deciding when to buy or lease a facility, when to repair or replace a piece of equipment, when to change a marketing plan and when to begin new product development

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Management &

OperationalControl

4 functions ofManagement

OC takes place when mid level managers monitorsthe activities of operating level managers

MC is the evaluation of mid-level managersby upper level managers

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Preparationof

FinancialStatements

4 functions ofManagement

Management complies withfinancial reporting requirements

as per law

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CMI and managerial functions

1 StrategicManagement

CMI is needed to make sound strategic decisions regarding choice of products, manufacturing methods. Marketing techniques & channels and other long term issues

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CMI and managerial functions

2 Planning &Decision Making

CMI is needed to support recurring decisionsregarding replacement of equipments,managing cash flow, budgeting RM Purchases, scheduling production and pricing

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CMI and managerial functions

3 Management &Operational Control

CMI is needed to provide a fair and effective basisfor identifying inefficient operations and to reward and motivate the effective managers

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CMI and managerial functions

4 Preparation ofFin Statements

CMI is needed to provide accurate accounting for Inventory and other assets, in compliance with reporting requirements, for the preparation of financial reports and for use in the three other management functions

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2 strategic management and strategic cost management

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strategic management and strategic cost management

Pressure on Business due to

Global CompetitionTechnological InnovationChanges in Business Process

ManagersMust think

Competitively

Doing so requiresStrategy

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strategic management and strategic cost management

•Anticipating changes•Product and production designed to accommodate expected changes•Flexibility•Ability to make quick changes•Speed to market•Agile manufacturing•Driving firm by using windshield not the rear view mirror•Creative and integrative thinking………

strategic thinkingStrategicissues aregaining

importance

More costInformationis Required

Focus onStrategic CostManagement

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Strategic Cost Management

SCM is the development of costmanagement information to facilitatethe principal management function,strategic management

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Mergers & Acquisition— tata steelIssue of IPO -Reliance PowerIndia as a Market -Pepsi appointing Indira NooyiLess Cost at other Plant----Bajaj ScootersSelling Shampoo in Pouch—Cavin Kare

Organizational Strategies

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3 Contemporary business environment- influence on cm

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contemporary business environment- influence on cm

1 Increase in Global Competition2 Advances in manufacturing technologies3 Advances in information technologies4 Greater focus on customer5 New forms of business organizations6 Changes in Social, Cultural, Political Environment

Changes in Business Environment which influencedModification in Cost Management Practices

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contemporary business environment- influence on cm

GlobalBusinessEnvironment

Increased CompetitionEconomic interdependenceWTONAFTA SAFTAEuropean UnionOther AlliancesHigh Value Low Cost

Increase need of CMI to competeIn other countries

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contemporary business environment- influence on cm

NewManufacturingTechnology

Speed To MarketFlexible manufacturingStatistical Quality ControlTarget CostingJIT

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contemporary business environment- influence on cm

InformationTechnologyInternet

E-commerce

Amazon. com

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contemporary business environment- influence on cm

Focus on ConsumerExpectations for product functionality & Quality

QualityServiceDeliveryFeatures of productsShort PLCLow cost high value

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contemporary business environment- influence on cm

New Form of ManagementOrganizationCustomer Based

Non Financial Measures Quality Time to delivery ServiceFlexible Structure

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contemporary business environment- influence on cm

SocialPoliticalCulturalConsiderationsWork Force

Ethical ResponsibilityFlexible and adaptableIncreased deregulation

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4 Strategic Focus on Cost Management4 Strategic Focus on Cost Management

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Strategic Focus on Cost ManagementStrategic Focus on Cost Management

CM CM focus is not on measurement per sefocus is not on measurement per sebut on identification of those measuresbut on identification of those measuresthat are that are CriticalCritical to the firm’s success to the firm’s success

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Sheep Story

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Strategic Focus on Cost ManagementStrategic Focus on Cost Management

Critical Success Factors Critical Success Factors ((CSF’sCSF’s) are measures of those) are measures of thoseaspects of the firm’s performance that are essentialaspects of the firm’s performance that are essentialto its to its competitive advantagecompetitive advantage and therefore, to its success and therefore, to its success

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influence of contemporary Mgt. techniques on CM

Computer aidedDesign &

ManufacturingTarget Costing Value Chain

BalancedScore card

Bench Marking

TotalQuality

Management

ContinuousImprovement

Activity BasedCosting &

Management

ReengineeringTheory of Constraints

Just in TimeMass

Customization

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5 How a firm Succeeds: the competitive Cost Management strategythe competitive Cost Management strategy

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Strategic Focus on Cost ManagementStrategic Focus on Cost Management

A strategy is set of policies, procedures and approachesA strategy is set of policies, procedures and approachesto business that produces long term successto business that produces long term success

MissionSpecific

PerformanceObjectives

Actions toAchieve

objectives

A strategy is a set of goals and specific action plans that, if achieved, provide the desired competitive advantage

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Paramjit Sharma

Strategic Focus on Cost ManagementStrategic Focus on Cost Management

A strategy is set of policies, procedures and approachesA strategy is set of policies, procedures and approachesto business that produces long term successto business that produces long term success

Mission20 years

SpecificPerformanceObjectives

5years

Actions toAchieve

ObjectivesCurrent Year

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Competitive StrategiesFollowed by Business Houses

Re-engineering Operational Processes,

Downsizing the workforce

Outsourcing Service Functions

Developing smaller, efficient Organizations

Societal Organizational Policies & Structures

Mergers & Acquisitions

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Mission Statements

Ford Motor (ford. com)

Provide personal mobility for people around the world

Ford Motor (ford. com)

Provide personal mobility for people around the world

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Mission Statements

United Parcel (ups. com)

To move at the speed of business

United Parcel (ups. com)

To move at the speed of business

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Mission Statements

Walt Disney (Disney. com)

To make people Happy

Walt Disney (Disney. com)

To make people Happy

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Strategic Measures of Success

Financial Measures of Success

Sales Growth Earning Growth Dividend Growth Bond & Credit Rating Cash Flow Increase in Share Price

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Strategic Measures of Success

Customer Measures

Market ShareCustomer ServiceDeliveryC SatisfactionBrand RecognitionMarket Position

Internal Business Process

Product QualityMfg.InnovationProductivityCycle timeReduction in waste

Learning & Innovation

CompetenceIntegrityEducation & TrainingMotivationInnovation

Non FinancialMeasures of

Success

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lack of Strategic Information- consequences

Decision making based on guess and intuitionLack of clarity in direction and GoalsLack of clear perception by customers & suppliersIncorrect investment decisionsIneffective to benchmark competitorsFailure to identify most profitable

Products Customers Markets

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6 developing a competitive strategy

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developing a competitive strategy

Cost Leadership

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developing a competitive strategy

Cost Leadership

Cost Leadership is a competitiveStrategy in which a firm succeedsin producing products or servicesat the lowest costs in the industry

NIRMA AMULBIG

BAZARCAVINCARE

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developing a competitive strategy

Cost Leadership

Cost Leader remains only so longas the consumer sees that productor service is at least nearly equivalent to competing productthat cost some what more

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developing a competitive strategy

Differentiation is a competitive strategy in whicha firm succeeds by developing and maintaining a unique value for the product as perceived byconsumers

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Target Scope

Broad(Wide Segment)

Narrow(Market Segment)

Advantage

Low Cost Product Uniqueness

Cost LeadershipStrategy

Differentiation Strategy

Focus Strategy(Low Cost)

Focus Strategy(Differentiation)

Porter's Generic Strategies

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Marketing Differentiation

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8 ways to create extra Value for customers

Cost Reduction through higher YieldReduce InventoryJust in timeReduce cycle timeRed. in Adm. CostImproving Safety for CustomersReducing Suppliers CostReduction Through Substitution

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Milind Lele5 Dimensions( Maneuverability)

1.Target Market

2.Product

3.Place

4.Promotion

5.Price

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Product

FormFeaturesPerformanceConformanceDurabilityReliabilityReparabilityStyleDesign

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Ordering EaseDeliveryInstallationCustomer-TrainingCustomer-ConsultingMaintenance &RepairsMiscellaneous

Services

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•Competence

•Communication

•Courtesy

•Credibility

•Reliability

•Responsiveness

Personnel

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Channel

COVERAGE

EXPERTISE

PREFERENCE

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IMAGE

Symbols

Media

Atmosphere

Events

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