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What Is Strategic Cost Analysis?

Jim B.
Jim B.

A strategic cost analysis is a study of how one firm's costs are aligned in comparison to its competitors in both the production process and in selling products. By doing such an analysis, a business can identify where its cost structure is comparatively strong and also where excess costs are bringing the business down. Some key areas to be considered when conducting a strategic cost analysis include the various costs of resources acquisition, labor, investment opportunities, and product pricing. It is especially important to perform this analysis when a business is seeking a strategy of cost differentiation to get a comparative advantage over one or more competitors.

Many companies concentrate heavily on the revenue brought in by sales of their various products and services. It is just as important for those companies to consider the costs incurred along the way to bringing in the revenue. Only by keeping costs down relative to revenue can profits be earned, and firms also have to be aware of how their cost structures compare to other firms in their industry. For those reasons, it is crucial for any business hoping to be competitive to perform a cost analysis.

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Those businesses in most need of a strategic cost analysis are the ones plotting a strategy of cost differentiation as a means of getting an advantage on their business rivals. This essentially means that the firm in question is not as concerned with having products of the highest quality. Instead, it wants to produce products similar to other firms, but at lower costs. By doing this, the firm can eventually reap more profits.

There are many areas where a strategic cost analysis might be useful in identifying advantages and disadvantages a firm might possess. First of all, the analysis should focus on the cost incurred by a business in acquiring the raw materials it needs to make its products. Sourcing is the term for how a business chooses to purchase these materials, and a cost analysis of this process can reveal inefficiencies that may exist.

From there, a strategic cost analysis should focus on the production process itself, finding areas where firms can trim the fat and still arrive at the same production amounts. If a firm is choosing to make a significant investment, whether that means expanding into a new location or trying to corner a different market, an analysis of the costs of such an initiative is paramount. The overall analysis should shed a light on the costs involved with practically every step of the process by which a product ends up on store shelves.

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