Week 5 - Strategic Cost Analysis

Question 1

Shank & Govindarajan (1992) - Strategic Cost Management (SCM)
4

Answer 1

Goes beyond Target Costing, aligning cost management with strategic goals

Analyze entire value chain for cost management is crucial. e.g. Removing unnecessary features that don’t add value for consumer (rather than just trying to cut their costs)

Decisions based on long-term strategic implications rather than short-term cost reduction

Could outsource certain activities which might improve focus on core competencies

Question 2

Shank & Govindarajan (1992) - Strategic Cost Management (SCM) Examples

2

Answer 2

**Cement Industry
**
Use value chain perspective to analyse upstream and downstream activities to optimize costs e.g. Firms locate plants closer to raw materials (quarries) reducing transport costs

**John Deere
**
Reliability identified as key value-add component even though incurred higher costs, aligning cost-management with its differentiation strategy

Question 3

Challenges of implementing SCM
5

Answer 3

Detailed data requirements throughout entire value chain - hard to access

Cultural barriers in firm as requires change in miindset e.g. Nissan Target Costing

As whole value chain, requires cooperationa cross divisions e.g. marketing, finance, design

Siloed Thinking: divisions can focus purely on their own cost-cutting, might not align with others so need collaboration

Overemphasis on cost-cutting which can contrast with SCM goals, might stifle innovation etc. if tech company

Question 4

Value chain definition

Answer 4

value-creating activities all the way from raw materials to the end-use product.

Shank states that most costing methods (target costing) focus on just the value add INTERNALLY e.g. in companies possession, not the entire chain