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Martin Wong explains that strategic cost management is based on two important concepts: processes and cost drivers. Whilst many businesses have applied activity-based techniques to re-engineer processes, the role of the cost driver has not been fully exploited. By viewing cost drivers at a far higher activity level, management can gain a richer and more robust understanding of cost dynamics, breaking down the discord between strategic and operational goals. He shows how one company has developed an activity-based approach to strategic cost management to avoid these problems
In recent years many companies have adopted an activity-based approach to cost management gaining substantial benefits at an operational level for process improvement and detailed costing. In strategy formulation, however, senior management have found this information too detailed and time-consuming to support their needs and have tended to rely upon using the traditional balance sheet and profit and loss approach to cost analysis. Therefore the risk of strategy formulation and operations planning becoming increasingly out of step with the reality of how the company operates has continued to grow.
This article aims to demonstrate how we have worked with one company to develop an activitybased approach to strategic cost management and therefore avoid the above problem.
As part of its strategy renewal process an international healthcare company embarked on a rigorous analysis of its key value drivers, in particular its operating profit margins for key brands, customers and geographies. It used activity-based analysis at a strategic level, sophisticated enough to capture business complexity yet intuitive and simple enough for it to be completed by an already overstretched senior management team.
The key elements of the strategic cost management process used are shown in Fig. 1.
Once the level of detail required from the analysis had been determined, senior management teams in each of the...