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Literature Review Assignment: Cost Management and Strategy
Winter Owens
BUSI730-Liberty University
Dr. Scott Morter
June 18, 2024
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Literature Review Assignment: Cost Management and Strategy
Introduction
The cost management activities of firms have always been a fundamental area of focus in
the business press and scholarly discussions (Rounaghi et al., 2021). Businesses are concerned
with making profits at the least possible costs. As such, they will develop various strategies,
including renegotiating wages and benefits (Agostino & Arnaboldi, 2021), trimming the
workforce (Aberdeen, 2022), or partnering with others (Marques & de Carvalho, 2020). The
ultimate aim is to develop a mix of inputs to produce the most valued output. Achieving the most
valued output and the minimum cost requires formulating a consistent and tenable strategy.
However, as Hrebiniak (2006) states, developing a consistent strategy is difficult, although
implementing it throughout the organization is the most difficult task. Strategy has become the
main concept of the contemporary era, replacing previous management activities such as
administration (Carter, 2013). The concept has a long history, although its meaning has kept
evolving. Although it has its roots in the military, strategy is being applied in other human
activities, especially business-related ones. The nexus between cost management and strategy
lies in understanding the competitive environment and the effects of the competition on a
business.
Contemporary Use
Cost management is often used in business literature, debates, and discussions. According
to Chapman et al. (2006), cost management is usually a euphemism for cost-cutting. It is a
response the management uses when they realise the firm is not raising sustainable profits.
Therefore, according to Chapman et al.'s (2006) explanation of cost management, it is a
reactionary move that precedes a firm's ceasing to have sustainable profits. In reality, a business
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cannot survive for long if it has to wait for sustainable profits to fall. In that regard, Chapman et
al. (2006) note that with the emerging competitive pressures, businesses must develop new cost
management approaches. Such approaches should help reduce the costs over the long term,
although the process is deeper and more subtle than most businesses realize (Anderson, 2005). It
is in that regard that the concept of strategy comes in. As Chandler (1969) historically noted,
strategy is the definition of a company's long-term goals, the adoption of actions, and the
allocation of necessary resources to achieve the objectives.
Strategy as Percussor to Costs Strategy
Therefore, a viable strategy is a prerequisite to a feasible cost management approach. In
business practice, enhancing a product's profitability is any business's primary goal. That can be
achieved by implementing measures that drive down costs – cost leadership or the company can
drive the prices up while ensuring that it delivers distinctive value to the customers (Datta,
2010). As such, the management will have to choose between its approaches and opt for the one
that is most feasible and aligned with the company's ultimate goals. The management's decision
on the approach to use is part of the strategy. As Porter (2008) notes, strategy entails choosing
activities that make a company stand out and establish a sustainable difference in the market.
That means a company can be known for cheap products, which can be achieved perhaps
through mass production. Another can be known for expensive products, such as luxury goods,
which are of distinct value to the customers. Hence, strategic approaches can be used in cost
management to create a niche.
Mission and Vision as Part of Cost Management Strategy
Over the last few decades, the concept of strategy has received a widely accepted and free
reference. As a result, it has received considerable and diverse attention from various authors
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such as Chandler and Porter. However, as Fuertes et al. (2020) noted, strategy comprises various
elements that make it a whole. The elements include the mission of the business, which is the
answer as to why the organization was created. The second one is the vision, which entails what
the management of the company's founders would like it to be in the coming years. The purpose
guides, controls, and encourages the organization to achieve the desirable result and become
what it ought to be in the years (Fuertes et al., 2020). As such, the strategy calls for various
approaches if the organization's mission is to be executed, the purpose is served, and the vision is
realized. For the company's ultimate goals to be achieved, the management must use the
available cost information to make and implement decisions.
Figure 1: Pestle Analysis. Available at https://th.bing.com/th/id/OIP.jraogIU-nzD-
jx6KJayGdAHaFj?rs=1&pid=ImgDetMain
The relationship between strategy and cost management can be understood through a
review of strategic cost management. According to Shank (1989), one of the initiators of the
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term strategic cost management, the concept entails using cost-related information in a manner
through which the company achieves its objectives. For Wilson (1995), strategic cost
management is a continuous process where the management aim to reduce costs in real terms
over the long run. Thus, the managers have first to identify the enterprise's significant costs and
then devise measures to reduce them. Anderson (2007) describes strategic cost management as
the key goal of a firm, which helps in the cost approximation of a product or service with the
firm's strategy. On the other hand, Guan, Hansen, and Moven (2009) describe it as the use and
utilization of data related to an enterprise's costs to identify the best approaches that can lead to a
sustainable competitive advantage. Thus, strategic choices will be made after making cost
analysis and hence the relationship between cost management and strategy.
Commercial Sustainability and Cost Management Strategy
The essence of cost management is to ensure that the company is competitive enough and
has sustainable profits. Therefore, before the management can manage the costs, it must first
create a strategy. According to Fuertes et al. (2020), every organizational strategy must define
where it is and where it wants to be in the future and the modalities to use to get there. It is
common business knowledge that a business will be more profitable if it achieves high prices or
lower costs than its competitors (Porter, 1998). Such an achievement is not accidental. Instead, it
is the product of strategy. According to Porter (1998), the achievement of superior prices or
lower costs than competitors is the product of strategic position. Fuertes et al. (2020) note that a
good strategy is a coherent set of analyses and arguments leading to actions that give responses
to a high-risk challenge. Hence, based on costs, the strategies are part of the generic form of
strategic positioning (Oliveria et al., 2016). Thus, the cost management strategies will be
influenced by both external and internal factors.
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Figure 2: Porters 5 Forces (Huebel, 2023) available at https://consulterce.com/five-forces-
analysis/
Suffice it to say that cost management and strategy are premised on analysis. Creating
strategies begins with analyzing the environment surrounding the business (Fuertes et al., 2020).
When analyzing the environment, the company or business will have the management make
decisions and create plans to improve competitiveness. Therefore, the company will analyze
what happens within the company while at the same time examining the modalities used by
competing firms. Various academicians and professionals have developed tools to analyze the
situation to develop strategic positioning. As Nikulin and Becker (2015) noted, one of the most
common tools of analysis is the SWOT analysis. The tool allows the company to evaluate its
strengths, weaknesses, opportunities, and threats. Therefore, there is a need to have a deep
understanding of the competitive environment (Nikulin & Becker, 2015). Such an understanding
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plays a fundamental role in evaluating the organization's learning capacity. That makes it
possible for the organization to improve its competitive advantage and survive in the competitive
world.
Figure 3: Swot Analysis (BiteSize Learning, n.d.) available at
https://www.bitesizelearning.co.uk/resources/swot-analysis-explained-examples-templates
Strategic cost management is a wide topic. According to Duci (2021), there is a need to
focus on cost analysis to make strategic choices. Various themes exist that holistically form an
indispensable component of strategic cost management. The first topic is the value chain
analysis. The value chain is a set or combination of related activities that form part of the
business process (Duci, 2021). They begin with purchasing raw materials up to the last point,
which may sometimes be recycling. The second topic is the cost driver analysis. In that regard,
management must examine the elements that cause the cost before developing a strategy. The
area of cost driver analysis has been the subject of numerous debates. For instance, according to
Shank (1996), production volume is the cost driver. The presumption relies on principles such as
economies of scale whereby the higher the production volume, the lower the cost. However,
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there is to more to costs. For instance, according to Fuertes et al. (2020), structural and
executional cost drivers exist. Thus, the nexus is between analyzing value chain and the cost
drivers.
Hence, the strategy will result following an analysis of the business environment and the
realization of the competitive advantage. Competitive advantage is gained when a business
operates at the lowest cost and implements product differentiation (Porter, 1980). In other words,
as Fuertes et al. (2020) note, lower cost positioning and product differentiation are fundamental,
or core, elements of competitive strategy. However, the process is not straightforward. The
competitive environment in any market is dynamic and influenced by various factors.
Nonetheless, the best strategy for a business is to develop an approach enabling it to operate at
the lowest cost. In other words, the management ought to roll out a set of activities that will
ensure it becomes a cost leader (Fuertes et al., 2020). Apart from researching where the business
can access raw materials at the cheapest cost possible, the management has to engage in
continuous analysis and reduce unnecessary costs such as advertisements. Thus, the essence is to
develop a sustainable approach that will enable the business to maximize profits and reduce
costs.
Summary and Recommendations
In conclusion, there is extant literature on cost management and strategy. The primary
objective of a business is to make the highest possible profits. That is realized when the business
produces at the least possible cost while selling at the highest possible prices. However, in the
contemporary business environment, there needs to be a point of equilibrium or a balance
between production and prices. Traditionally, the issue of cost management was confined to
cost-cutting. Such moves were usually reactionary, and they would include strategies such as
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laying off employees. However, there is more to the dynamic markets in the contemporary
business environment. For instance, even when businesses are monopolies, they cannot just
impose a strategy of setting high prices because of their position. Consumer laws prohibit that.
Thus, the integration of cost management and strategy is sustainable. As a result, tools such as
SWOT and PESTLE are used to make assessments and analyze the best strategies.
Understanding the business environment from a wide perspective and implementing the findings
make an organization enjoy a competitive advantage.
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