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This month we are beginning a series of columns by Robin Cooper and Regine Slagmulder on the topic of strategic cost management. The first column explains the term and lays the groundwork for future columns that will discuss various facets of strategic cost management in greater detail.
In today's highly competitive environment, cost management has become a critical survival skill for many firms. But it is not sufficient to simply reduce costs; instead, costs must be managed strategically. Strategic cost management is the application of cost management techniques so that they simultaneously improve the strategic position of a firm and reduce costs. Strategic cost management can be applied in service and manufacturing settings and in not-for-profit environments.
The concept of strategic cost management is illustrated best by example.1 There are three types of cost management initiatives: those that strengthen the firm's competitive position, those that have no impact on the firm's position, and those that weaken it.
The first class of initiative can be illustrated by a hospital that redesigns its admissions process for patients so that it is simpler, faster, and less stressful on the patients to be admitted. If patients have a choice of hospital they will enter, the new process will make the hospital more attractive to them. Hence, the strategic position of the firm has been strengthened.
The second class of initiative can be illustrated by an insurance company that redesigns its accounts payable system to make it more efficient. This project has no strategic significance other than to make the firm more profitable. Unless the additional profitability is significant, the project will have no strategic implications. The strategic position of the firm remains essentially unchanged.
The third class of initiatives can be illustrated by an airline's decision to reduce headcount by no longer having "floaters" ask passengers why they are queuing up to get their tickets. This question is important...