Traditional cost management and strategic cost management are the terms used in the context of cost management techniques used by the companies to handle the various costs related to the smooth functioning of the company. While both techniques of cost management have their own place and importance however there are many differences between the two, let’s look at some of the differences between traditional cost management and strategic cost management –
Traditional Cost Management VS Strategic Cost Management
Meaning
Traditional cost management in simple words refers to a system where the company allocates various direct and indirect costs to the production process and tries to minimize the costs so that the profit margin of the company improves as the idea behind traditional cost management is to achieve cost control and cost reduction. Strategic cost management in simple words refers to a system where the company looks to achieve cost control but at the same time looks to build or increase the strategic value of the company by ensuring that only those costs are controlled which have little or no impact on the long term value of the company. In other words, traditional cost management is all about reducing costs as much as possible, while strategic cost management is about aligning costs with the company’s strategy.
Long Term Focus and Short Term Focus
Another important difference between traditional cost management and strategic cost management is the focus. Traditional cost management is focused on short-term cost reduction, while strategic cost management is focused on long-term value creation. In traditional cost management, the goal of the company is to reduce costs as much as possible in the short term, without paying attention to the long-term consequences of the decision taken. This often leads to sub-optimal decisions that can have negative long-term consequences. In contrast, strategic cost management takes a long-term view and focuses on creating value for the company. This means making decisions that may not immediately reduce costs, but that will create value for the company in the long run.
Nature
Traditional cost management is more operational in nature implying that since it involves work related to cost reduction and cost control it can be carried out more effectively by operational managers or lower and middle-level managers while strategic cost management is more strategic in nature as it involves long term value creation of the company along with cost reduction and hence it can be carried out more effectively by the top management of the company. In simple words while in the case of traditional cost management managers do the single task of cost reduction exercise but in the case of strategic cost, management managers do multitask by focussing on cost control as well as long-term value creation of the company.
Impact of Traditional Cost Management and Strategic Cost Management
In the case of traditional cost management since the focus of the company is solely on the cost reduction it can have a big negative impact on other factors like the quality of the product being manufactured, customer service being impacted, employees morale getting affected, and so on because due to short term outlook of traditional cost management company thinks one-dimensionally and ignores all other factors. When it comes to strategic cost management the company does not think one-dimensionally rather it adopts a 360-degree approach where the focus is on cost reduction but at the same time other factors are also given equal importance so that the long term value of the company is not affected due to cost reduction exercise undertaken by the company. Hence for example if the company in a bid to achieve cost control cuts costs on strategically important areas leading to a decline in customer satisfaction and customer service then its impact will not be visible immediately but after some time it can have a big negative impact on the goodwill of the company which in turn will affect the sales and profit of the company in the long run.
Flexibility
In the case of traditional cost management the company has a more rigid approach in the sense that the company tries to reduce costs by adopting age-old methods of cost control which are being carried out for many years but when it comes to strategic cost management the company adopts more flexible approach as the idea behind strategic cost management is create a long term value for the company which cannot be achieved if the company is rigid and follows age-old methods rather it requires a flexible approach in decision making of the company with respect to cost management aspects of the company.
As one can see from the above that there are many differences between traditional cost management and strategic cost management and that is the reason why any company thinking of adopting either of the cost management systems should first carefully read the above points and then only should take any decision.