Strategic cost management

The present work assumes the category of collaboration to the approach of Strategic Cost Management, which we consider an effective tool, together with the application of new cost trends. We are facing what is called the era of knowledge and where change is seen as permanent and lasting in terms of times and results that we want to obtain.

Our traditional accounting system has as its main objective to be oriented to the third party user of accounting information, call them, banks, DGI, investors, etc. which can be nurtured, from the accounting information that emerges from a balance sheet, from a series of data for decision-making. But this information suffers from a great inconvenience, it is relative to the past, which in a certain sense disables it to make decisions regarding the future.

Thus, the main objective of accounting is to provide timely, truthful, reliable information, but oriented to decision making.

In other words, we are faced with a dilemma, there are accounting systems that record the past and with which, we must or try to feed ourselves for future decision-making that, in the current world of permanent change, is, in the opinion of specialists, insufficient to comply with these objectives, criteria to which we adhere.

Decisions are actions that will be taken in the future, whether near or far, which must be supported by information. For this we must make the distinction between, data information and knowledge. The data is an isolated fact that describes the reality and / or temporal spatial circumstances. Information is the systematization of data in a logical and orderly way. Knowledge is the work carried out on this information, thus obtaining a subsequent development that validates it as such.

Putting things like this, decision-making both at a managerial and operational level requires information obtained from systems that allow the formulation of guidelines and criteria which, when combined and systematized, enable us to direct actions towards the future.

From this macro idea, a series of techniques and approaches have been developed that come to solve, in part, the proposed dilemma and guide us to obtain information that becomes vital for decision-making.

Strategic cost management is one of them and its focus is very particular since its authors have incorporated the strategic issue within the scope of costs, which is already novel.

Methodology

Before developing the GEC theme we must clearly understand what the concept of what we call strategy is, and then understand both the objectives, the methodology, the advantages and disadvantages of the system…

The strategy should be included, as a guiding principle, in the context of the direction of an Organization, or company or business units considered.

Vision and mission

There are two decisive steps to establish and maintain this Organization, the first is the concretion of a vision of the future and the second is to convert this vision into a mission that defines the purpose or raison d'être of this organization.

This vision summarizes its values and aspirations in very generic terms, without making specific statements about the strategies that will be used to make them come true.

The corporate vision provides a bond of union for the various holders of interests, both internal and external in the organization.

The development of the vision has its own characteristics that if not fulfilled can lead to failure for the entire organization as a whole. In the first place, the development of the vision must be shared with the entire organization, that is, it generates commitment and enthusiasm since it demands an arduous and costly process in terms of time.

Secondly, the coordinating leader of the development of the vision and its subsequent adaptation must be committed to the permanent change structure that we live today, otherwise there is a risk of developing rigid structures that cannot achieve their objectives due to better determination of the vision that you have realized, that is, you must sell the vision to the Organization as a whole.

This brings us to the third characteristic, that leaders must recognize the complexity of changing an outdated vision so that it can reflect new realities.

From this vision we must determine the mission of our Organization and for this we must answer the question: what is our reason for being ?, which implies having a broader sense of satisfaction of the interests of shareholders and investors, which it is the implication of the satisfaction of the human resource and the clients of the Organization. Therefore, it seeks to contribute in some way in a unique way, both to the same organization with its internal interests, and to external interests in order to create a distinctive source of value.

In other words, the mission must transmit the essential values of the organization as a whole, translated into ways of acting in order to achieve the vision.

We will briefly review what an organization's mission statement should contain, as an illustrative and non-exhaustive list.

Company product or service Markets Technology Company objectives Essential philosophy and / or values I accept that the company has a public image of itself that it wishes to leave in society, etc.

These statements must be substantiated with the vision and formally written and communicated to the entire organization.

There are jobs where the following three missions have been proposed that a business unit can adopt.

Build: This mission involves the goal of increasing market share at the expense of short-term gains and cash flow. A business unit that follows this mission will be a user of cash, since the flow of money produced is not sufficient to meet their investment needs. This mission can be used in Organizations with low market share in high growth sectors. Maintain: This mission is characterized by the protection of the market share of the business unit and the competitive position. It is ideal in the case of high market share and high growth sectors. Harvest: This mission implies the goal of maximizing short-term profits and cash flow, even at the expense of market share.

goals

From the determination of the mission, which we have briefly reviewed, the objectives are established, which are the target towards which the efforts of the organization are oriented. These can be of three types according to the execution time of each one, short, medium and long term, each organization determining what is the appropriate term for each of them.

The main characteristic of the objectives is that they must be possible and measurable in time and in quantity, in order to develop the strategies that are the explicit measurement of the objectives.

Strategies

How can we define a strategy?

In principle, it represents the organization's efforts to materialize its dreams regarding the future, how to position its products in the market that it has previously defined, according to the expectations of demand and its competitors, how to satisfy the needs of the client, the main actor in strategic development, how to develop internal and essential competences, how to build synergistic effects to increase your competitive potential, etc.

The term strategy refers to adjusting the organization's activities to the environment in which it operates, and the resources it has.

For this we must locate ourselves in three different LEVELS in which the organizations formulate their strategies.

The first in the business field, where it seeks to develop a sustainable competitive advantage in its specific branches, commerce, industry and / or services. This level focuses on the theoretical framework of Michel Porter.

Second, attention is directed to the functional level by which the administration of internal organizational functions is governed. (Finance, costs, marketing, etc.) to add value to goods and services by mobilizing essential skills. »At this point the value chain appears on the scene. This is where a company is broken down into its activities of strategic relevance in order to understand the behavior of costs and the current and potential sources of differentiation. »(Michel Porter 1980)

Thirdly, attention is directed towards corporate strategies or multiple business units, defined here as those that seek synergy for an organization through the skillful conjunction of the portfolio of companies or business business units.

Analyzed the three levels of strategy formulation, and following the scheme of Michael Porter, who conceptualized this, as decision making for an organization that operates a single industrial activity, this implies formulating the strategy for each strategic business unit (UEN), or one that operates by different divisions or in products

The formulation itself would answer the question: How are we going to compete in this industrial, service and commercial branch, or product, in order to achieve a sustainable competitive advantage and thus a profitability above average?

The analytical mechanism of the formulation is established evaluating the five competitive forces that shape the industrial, service or commercial environment. These five forces are:

The threat of new companies entering the market Negotiation capacity of suppliers Negotiation capacity of buyers The possibility of using substitute products The rivalry of current competitors.

Each of them has its characteristics, weaknesses and strengths that influence the development of a strategy.

Once the analysis mechanism is established and taking into account the presented scheme, we can analyze the different strategies that are presented in order to create a sustainable competitive advantage over time:

Cost leadership: Emphasizes achieving low cost compared to competitors. This can be achieved through systems such as economies of scale, effects of the learning curve, minimization of development and research costs, etc. It is suitable in cases of large production volumes and with relatively high market shares in its industries. Differentiation: The main accent is to differentiate or distinguish the product offered by the business unit, creating something that customers perceive as different, exclusive or higher than the competition. In some cases the difference is perceived by the customer and enables prices with a premium, in its final value. The focus: this seeks to segment the markets and attract only one or one of the organization's groups of consumers or buyers.This is the example of niche markets.

From the concepts presented, we will be able to infer what is the relationship between the strategic and the costs in order to be able to elaborate what is called the Strategic Cost Management. This seeks a new approach to traditional accounting, formulating a strategic vision whose objective is to achieve a degree of integration between costs and the value chain.

Starting from the conviction that accounting is not an objective in itself, but is only a means to help achieve business success and from this concept infer that cost systems should be evaluated based on the role expected comply, this implies that systematically elaborated management control instruments must be developed.

When making a comparison between traditional accounting and GEC we can see that both have different objectives and characteristics.

We can build the following comparative table

Traditional Accounting Management Strat. Costs

Useful way to analyze costs

Cost analysis objective

Cost behavior

Depending on the products, clients and functions With a marked focus on the internal.

Added value is the key concept

They are three.

Record keeping Management by exception Troubleshooting.

It is basically a function of the production volume:

Variable cost, fixed cost, combined cost, etc.

Depending on the different stages of the entire value chain.

Very marked focus towards the external.

Added value is a limited concept.

All three components are present, but the strategic component, either low cost or differentiation, is added.

Cost is a function of strategic selections. These are both structural and functional causal functions.

We can ask some questions in order to give some color to this explanation, in order to reach conclusions about what is the usefulness of cost accounting and what is that of strategic cost management.

We must ask ourselves, if traditional cost accounting meets clearly distinguished business objectives? If the cost system increases the chances of achieving the objective for which it was selected? AND…

If the objective that the cost system helps to achieve, strategically fits with the overall purpose of the company.

The answers are clearly forceful. NO. This means that the GEC has the strengths of answering these questions in the affirmative and a different and fundamentally useful system can be consolidated at a time when reality is constantly changing.

How do we relate these concepts to the GEC?

The first is to define it, for which we express that »Strategic Cost Management is a continuous, cyclical process of formulating strategies, communicating these strategies, developing and using tactics to implement them, and developing and establishing controls to supervise the success of the previous stages. For this reason, accounting information is useful for each stage of this cycle. »

We will briefly explain each one of the different processes of the definition previously exposed. In the first, accounting information is the basis for conducting the financial analysis, which is an element of the process of evaluating alternative strategies. In the second, reporting is one of the important ways in which these strategies are communicated to the organization as a whole. In the third, in the development of specific tactics that support the strategy as a whole and its implementation, financial reports prepared on the basis of accounting information, are one of the elements that supports the tactics, to achieve that the desired objectives are met.

In the fourth, the evaluation of the performance of managers or of the different business units usually depends on accounting information.

We could define the GEC in another way as the area that is responsible for seeking sophisticated knowledge of the company's cost structure, in order to achieve sustainable and continuous competitive advantages over time.

In it, accounting is basically used to facilitate the development and implementation of the business strategy.

Which with the basic components of the GEC.? They are three:

Analysis of the value chain Analysis of strategic positioning Analysis of the causes of costs.

Value chain

As we discussed earlier, Michael Porter developed the concept in his Competitive Strategy (1980), which is based on the fact that each business unit must develop a continuous competitive advantage, based on cost, differentiation or both.

The value chain analysis begins with the recognition that each company or business unit is »a series of activities that are carried out to design, produce, market, deliver and support their product». By analyzing each value activity separately, managers can judge the value of each activity, in order to find a sustainable competitive advantage for the company.

By identifying and analyzing the company's value activities, managers operate with the essential elements of their competitive advantage, since the efficiency and effectiveness of each of the activities affects the company's success in its low-cost strategy., differentiation or focus.

The activities can be divided into two types, the main ones and the support ones. The first are internal logistics, operations, external logistics, marketing, and service. This series of activities can be imagined as a stream of related activities, starting from the arrival and storage of raw materials or inputs for production processes, their transformation into final products that are shipped, marketing and sales activities to identify, reaches and motivates customers or groups of customers and service activities to provide customer and / or product support after purchase.

Then support activities, as the name implies, provide general and specialized support for primary activities.

These are administration, purchasing, human resources, technological development, and infrastructure. We must consider these as business functions and why without them an organization would not exist and together with the degree of connection with the main ones, they make up what is called value chain analysis, which as a tool in formulating strategies requires that Administrators not only analyze each value activity separately in detail, but also examine the critical links between internal activities.

When referring to the cost issue, this approach is different from that developed by traditional accounting, which is based on the concept of value added, which involves maximizing the difference between purchases and sales. In other words, value added focuses its attention on the internal functions of the Company, beginning with purchases from suppliers and ending with costs paid by customers (sales).

The GEC explains to us that by setting such a narrow focus, such as added value, the Company loses a series of advantages and opportunities that begin before the purchase and end beyond the sale to the customer.

As we previously argued when analyzing strategies, a business unit must manage to develop a sustainable competitive advantage through a series of strategies, which can be low cost, differentiation and / or focus.

Before analyzing the methodology of the value chain, we will expose the differences that exist in the conception of added value (principle on which traditional accounting is based) and the value chain, (principle of GEC.), Using a table comparative.

This table will help us understand why the value chain is much more comprehensive for the development of a sustainable competitive advantage and also how it can incorporate the Vision and Mission concepts previously exposed.

Value chain methodology

The fundamental steps to build a value chain are:

Identify the value chain of the industry and assign costs, income and assets to value activities. Diagnose what are the causes of costs that regulate each value activity. Develop a sustainable competitive advantage, either by developing the cost causes better than the competitors., or by reconfiguring the value chain.

Competitive advantage cannot be analyzed within a company as a whole, but the value chain must be broken down into its different strategic activities, since each one incurs costs, generates income and is linked to assets, separating itself from those that represent a significant percentage of operating costs, or if the cost behavior of the activities are different, or if the competitors carry them out differently or if it has high potential to create differentiation. From this development, the return on assets can be calculated for each value activity.

From the previous analysis, we must identify the cost causes that explain the cost variations in each value activity. In traditional managerial accounting, cost has only one cause, which is the volume of activity or production. In the value chain, the concept of production volume captures very little of the richness of cost behavior. Multiple cost drivers coexist which also differ through value activities. These can be structural or executive. The first we can define as those that when chosen by the company drive the cost of the product. These are: a. The scale, that is, the amount of investment to be made in areas of manufacturing, research, marketing resources, etc.b. Extension, that is, the degree of vertical integration. c. Experience refers to the number of times in the past the company has done what it is doing now. d. Technology, we refer to the technological methods used in each stage of the value chain. and. Complexity refers to the breadth of the line of products or services that will be offered to customers.

As for the second, executive, are those that are decisive in establishing the cost position of a company and that depend on its abilities to execute them successfully. Within the list of these causes we can mention the following: a. Commitment to the working group, b. Total quality management, c. Capacity utilization, d. Efficiency in the distribution of the plant, e. Product configuration and f. Take advantage of existing ties with suppliers and / or customers through the company's value chain.

The third step, after identifying the value chain and to diagnose the causes of cost for each activity, you can gain a sustainable competitive advantage through two ways: I. Controlling the causes of costs better than the competitors, that is, you can analyze the causes and improve the performance of the causes of costs, Benchmarking can be used, on the competitors, knowing that this option should always be reviewed and reconsidered in the short term, since the competitor will operate in the same way. II. Reconfiguring the value chain: which implies that while the causes of costs are recomposed, the cost chain will have to be redefined in the activities where it is most needed.

There are a number of difficulties in building the value chain, which we will mention. First, you need to calculate the price (revenue) for intermediate products, isolate key cost drivers, compute supplier and customer margins, and build cost structures for competitors, to name a few.

Strategic positioning.

We will analyze here what is the role of accounting information within the business, which in principle is to facilitate the development and implementation of strategies.

This is what sets the GEC apart from traditional managerial accounting. The relationship between costs and strategies, explained above, is resolved by the influence they have on each type of strategy chosen, the generation of costs and therefore the control that must be carried out in the management process.

The strategies differ in the different types of organization and the controls should be adapted to the requirements of the chosen strategies.

The link between controls and strategies originates from the following ideas:

1. For effective execution, different strategies require different task priorities, key success factors, experiences, and perspective and behaviors. Control systems are units of measures that influence the behavior of people whose activities are being measured. a design of control systems according to the coherence between the strategy and the influence on people.

The strategic analysis is based on the aforementioned concepts, related to the Vision, Mission, Objectives, and Strategies that operate as a main vertex in the elaboration of controls and the possibility of obtaining sustainable competitive advantages and care in the value chain.

Joining concepts, we should insist that management control depends on the strategy chosen to obtain the competitive advantage and on the options chosen with respect to the value chain. This is in light of the mission formulated and the strategy chosen.

In other words, a company whose mission is defined within the framework of a mature market, with undifferentiated products and a cost-leading strategy, product design costs should be a tool of fundamental importance.

Thus, each organization, and depending on the mission formulated and the chosen strategy, must assign a control system to it, taking into account other factors such as technology, culture, the external context of the environment, etc.

Causes of the cost.

The third constituent element of the GEC is the concept of the causes of cost.

These take a preponderant place in the GEC, due to the strategic approach that is given to these causes and above all because of the union, in which the value chain and positioning are related to this third element.

Thus, the GEC accepts the fact that costs are driven by multiple factors, this also explains the different cost variations in each activity.

As we mentioned earlier in management accounting, cost is an exclusive function of production volume. From there follows a series of analyzes related to this factor, within which we will mention, by way of example, the following, the division between fixed and variable costs, the volume, cost, utility, budget control, etc. relationship.

It is here where the GEC generates the novelty of not only considering production volume as the cause of cost, but also incorporates a series of more advanced models in the relationship of cost causality, as we saw earlier.

By way of mention we will say that the causes are divided into two:

Structural causes of execution

We will not abound in them, we will only establish that the GEC advances on managerial accounting by approaching issues from another angle and fundamentally positions cost within the spectrum of decision-making in the Company in an integral way and opens a different path towards management tools, that can be used in search of an improvement in the administration of an Organization.