MBA 710
Strategic Cost Management
Introductory comments on business,
managerial information and cost control
1
Business Made Simple


Managers need to know

What do the customers want?

What will they pay for it?

What will it cost to provide it?
Costly mistakes can be avoided with this
information.
2
Information is the Key to Success

“To manage in the future, executives will
need an information system integrated with
strategy, rather than individual tools that so
far have been used largely to record the past”

Information should answer the key question

What should I do?


Not
What are the results of what I’ve already done?
3
Information is the Key to Success

Must develop an integrated cost / quality /
functionality measurement system

Traditional accounting information is not sufficient

Backwards looking

Fails to measure important items

Much important information is not quantitative

Designed to meet reporting requirements, not
management needs
4
Types of Information

Foundation information

Basic diagnostics




May indicate something is wrong, but not why
Basic financial ratios
Benchmarked
Productivity information



Productivity of key resources
Concern should be for total productivity
Benchmarked
5
Types of information

Competence information



Indicates where a business has a leadership advantage
Innovation is the most important core competence
 To win, you have to be the best at something
Resource allocation information



How to best use the resources available
What if it fails to produce the intended results?
What if it is more successful than we imagined?
6
Effective Cost Management

Cost management is most effective at the
development stage

About 85% of costs are committed to at the
development stage

It is too late to effectively manage costs at the
production stage

All links in the value chain must be managed

Suppliers
you
customers
7
Cumulative
cost
Cost Commitment and Incurrence
Cost
commitment
Idea
Cost
incurrence
PrePostR & D production Production production
8
Return on Management

Management effort is a vital resource

Return on management
Organizational productivity
Management time and attention invested

Stay focused on strategy

Do not diffuse talent over too many opportunities
9
Return on Management

Channel energies into the correct projects



Detrimental capital budgeting
Pick important measures

Should reflect critical success factors

Avoid measures that are interesting but not useful
Can managers recall their key measures?

Maximum of seven measures
10
Return on Management

Does everyone watch what the boss watches?



Are there common goals within the organization?
Conflicting goals may be beneficial

“Stretch” goals with adequate resources

Stimulate creativity
Reduce paperwork and the processes that tie
managers down

Distinguish between useful and interesting information
11