The root causes of the development and changes in cost management
Cost management is not static. There are profound reasons behind its development and changes, mainly stemming from the transformation of the enterprise manufacturing environment and the innovation of management theories and methods. Tracing back to the source, the changes in these two aspects are triggered by the changes in the external environment of the enterprise.
The changes in the external environment of enterprises present four prominent characteristics.I. In both domestic and foreign markets, most products are in a state of oversupply. It is like a fierce battlefield, where numerous enterprises fight tooth and nail for the limited market share, and the intensity of market competition is increasing day by day.II. Consumers' demands are becoming increasingly diverse. They are no longer satisfied with uniform products but yearn for unique experiences. Meanwhile, customers' requirements for product quality are getting higher and higher, as if they are examining every detail of the products with a magnifying glass.III. The international division of labor and cooperation is becoming closer. Enterprises from different countries are interdependent in the global industrial chain. However, at the same time, the competition has become more brutal, just like numerous racing cars competing on a narrow track.IV. New technologies and new processes are emerging in an endless stream like bamboo shoots after a spring rain, and the trend of innovation is prevailing. This means that if enterprises do not keep up with the trend, they are likely to be left behind by the train of the times.
These changes in the external environment, like catalysts, require the manufacturing environment of enterprises to make corresponding changes to adapt to new market demands and competitive situations. At the same time, they also prompt enterprises to innovate management theories and methods to enhance their own competitiveness.
The basic framework of strategic cost management
Value chain analysis
The value chain can be regarded as a value creation network formed by the interconnection of various activities. It is not simply a pile of isolated activities, but an organic system of interdependence and mutual influence. The core of value chain analysis lies in conducting an integrated analysis of relevant activities in the entire process from raw material suppliers to end - product consumers from a strategic perspective, so as to explore effective ways to control costs.
From an analytical perspective, value chain analysis can be subdivided into industry value chain analysis, internal corporate value chain analysis, and competitor value chain analysis. Industry value chain analysis can help enterprises understand the value - creation process of the entire industry and identify potential cost advantages and opportunities. Internal corporate value chain analysis focuses on the various activities within the enterprise itself, identifying which links can create value and which links have cost waste, so as to optimize them. Competitor value chain analysis is to find out the differences between oneself and competitors by studying the competitors' value chains and formulate targeted competitive strategies.
Strategic positioning
Strategic positioning for an enterprise is like finding its own course in the complex market ocean. It refers to the process in which an enterprise selects appropriate competitive weapons to compete against its rivals in the market. In strategic management, an enterprise first needs to conduct in - depth analysis of the life cycle and market share of its own products. By understanding the product life cycle, an enterprise can determine whether the product is in the introduction stage, growth stage, maturity stage or decline stage, so as to formulate corresponding strategies. Meanwhile, analyzing the market share can enable the enterprise to clarify its position in the market, whether it is a leader, a challenger or a follower.
Based on the above analysis, enterprises need to determine their own strategic directions. In terms of financial resources, enterprises may need to increase investment to support product R & D, production, and market promotion. In terms of pricing strategies, sometimes, in order to expand market share, enterprises do not hesitate to sacrifice short - term cash flow and adopt low - price strategies. In cost management, enterprises need to clarify whether to adopt the product differentiation strategy or the cost leadership strategy. The cost leadership strategy can achieve economies of scale through mass production, pursue the curve effect, and strictly control all aspects of costs at the same time. The product differentiation strategy focuses on cultivating customer loyalty to the brand, and makes products stand out in the market by providing excellent customer service and improving product design.
Cost driver analysis
Cost drivers are the fundamental reasons for the occurrence of product costs. From the perspective of the value chain, each value - creating activity has its unique cost drivers, which explain the cost composition of that activity. Therefore, each value - creating activity contains a unique source of competitive advantage.
The cost drivers that strategic cost management focuses on are mainly divided into two major categories: structural cost drivers and executional cost drivers. Structural cost drivers determine the basic economic structure of an organization, including factors such as scale, scope, experience, technology, and diversity. The size of the scale will affect the cost level of an enterprise. Large - scale production may lead to cost reduction, but it may also face problems such as increased management difficulty. Scope refers to the degree of business diversification of an enterprise. A reasonable business scope can achieve resource sharing and synergy effects. The accumulation of experience can improve an enterprise's production efficiency and management level and reduce costs. Technological innovation can bring about improvements in production processes and cost reduction. Diversity includes the diversity in product types, customer groups, etc. Appropriate diversity can meet the needs of different customers, but it may also increase costs.
Execution - related cost drivers are closely related to the enterprise's operation procedures, mainly including factors such as cohesion, total quality management, utilization of production capacity, product structure, and connection relationships. The cohesion of enterprise employees can improve work efficiency and reduce communication costs. Total quality management can ensure product quality, reduce the defective product rate, and thus lower costs. Reasonable utilization of production capacity can avoid the idleness and waste of resources and improve production efficiency. Optimizing the product structure can increase the added - value of products and reduce costs. Good connection relationships, such as close cooperation with suppliers and customers, can reduce procurement costs and sales costs.
Compared with activity-based cost drivers (such as materials, labor, etc.), structural cost drivers and executional cost drivers are at a higher level, and many of them are non - quantifiable factors. However, their impact on product costs is more profound and long - lasting. Therefore, enterprises should pay sufficient attention to them. Given the established basic economic structure of an enterprise, through the analysis of executional cost drivers, the enterprise can enhance the initiative of various executional cost drivers and optimize their combination, so as to achieve the best results in value - chain activities. But for structural cost drivers, more is not always better. For example, simply expanding the enterprise scale or blindly applying high - tech may bring a series of problems to enterprises with limited management capabilities, which is actually not conducive to cost control.
To gain a strategic cost advantage, an enterprise needs to start from two aspects. I. Control cost drivers. Through in - depth analysis and management of cost drivers, reduce costs. II. Recombine value - chain activities. Optimize and adjust the enterprise's various activities to improve the value - creation ability.
The practical significance of implementing strategic cost management in Chinese enterprises
Chinese enterprises should actively establish the concept of strategic cost management and build a new cost management model. The essence of strategic cost management is to seek cost advantages. Studying and implementing strategic cost management has important practical significance.
First of all, the formation and development of strategic cost management are an inevitable result of the modern market economy and competition. In the fierce market competition, cost is the key factor determining whether an enterprise's products or services can capture a share in the market and how much share they can capture. The core factor affecting cost is the enterprise's strategic cost rather than the traditional operating cost. Strategic cost management can help enterprises control costs from a strategic perspective and enhance their competitiveness.
Secondly, the formation and development of strategic cost management are the inevitable requirements for establishing and perfecting the modern cost management system and strengthening enterprise cost management. In modern cost management, strategic cost management occupies an important position. It breaks through the limitation of traditional cost management, which only focuses on the micro - level, and shifts the focus to the broader field of the overall enterprise strategy. This is conducive to enterprises making accurate cost forecasts and decisions, thus correctly choosing the enterprise's business strategy, properly handling the relationship between enterprise development and cost management, and improving the overall economic efficiency of the enterprise.
Secondly, the formation and development of strategic cost management contribute to the renewal of cost management concepts. In traditional cost management, cost reduction is often simply attributed to saving, and saving has become the main means of cost reduction. Undoubtedly, saving plays an important role in cost management, but it is not the only means. The goal of modern cost management is to obtain as much use - value as possible with as little cost expenditure as possible, so as to provide a better foundation for enterprises to earn profits and achieve the cost - benefit principle. The cost strategy chosen by an enterprise should depend on the enterprise's overall business strategy and competitive strategy. Cost management must serve the enterprise's overall business management.
Finally, strategic cost management is an important tool for achieving an enterprise's business and development strategies. The research and application of strategic cost management and the external environment and internal management of an enterprise promote and restrict each other. It encourages enterprises to take overall considerations, subordinating local interests to overall interests and current interests to long - term interests. At the same time, enterprises can change their own situations through strategic cost management, reduce the adverse impacts of the external environment on the enterprise, and thus better achieve the enterprise's business and development strategic goals.