Introduction to Strategic Cost Management (SCM) is an essential aspect of the CA Final curriculum, particularly in the Strategic Performance and Operations Management (SPOM) paper. It involves using cost management techniques to set, monitor, and control strategic objectives within an organization. The main goal is to gain competitive advantage and achieve business excellence by effectively managing costs.

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Important Notes

Value Chain Activity : Primary Activities comprising of:

1. Inbound logistics cover receiving, storing, and handling raw material inputs. Mind it, inbound logistics don’t cover the purchase or procurement. Inbound logistics are deeply impacted by the location of business operations.
2. Operations include the transformation of raw materials into finished goods and services; operations must be seen in depth; it may or may not be possible for an organisation to bemaster of all the activities that are required to render the service or to convert raw material into finished goods; the organisation may take the decision to outsource those activities which are not its core competences.
3. Outbound logistics covers storing, distributing, and delivering finished goods to customers. This includes how, when, and where for customer reference. Where to deliver, how to deliver, and when to deliver.
4. Marketing and sales activities comprise conducting market research to determine the marketing mix8 that comprises product, price, place, and promotion. McCarthy’s concept was further developed by Booms and Bitner9 into the 7Ps of the marketing mix by adding three more Ps, i.e. People, Process, and Physical evidence (sometime referred to positioning).
5. After sales service includes all those activities that occur after the point of sale, such as installation, training, and repair. It is important to note that the importance of after sale services is higher in the case of durable products in comparison to products falling into the FMCG category. In the service industry after sale service depends on the nature of the service.

Support activities also referred as to secondary activities; it comprises of:

1. Firm infrastructure deals with how the firm is organised. It basically describes the activities pertaining to legal, general management, administrative, accounting, finance, public relations, and quality assurance in the organisation apart from who will perform these and how.
2. Technology development describes how the firm uses technology. Activities such as research and development, IT management, and cybersecurity that build and maintain an organization’s use of technology.
3. Human resource management describes how people contribute to competitive advantage. Basically, it deals with the management of human capital. Human resource functions such as hiring, training, building and maintaining an organizational culture, and maintaining positive employee relationships.
4. Procurement signifies purchasing, but not just limited to materials. Finding new external vendors, maintaining vendor relationships, negotiating prices, and other activities related to bringing in the necessary materials and resources used to build a product or service.

2.Competitive Advantage :A Competitive advantage is the ability of an organization to outperform its competitors and make more profits than its competitors do from an equivalent set of activities through superior performance. Gaining and maintaining a competitive advantage over a period of time is challenging for organisations in the global economy with the speed of competition and information exchange possible today. Companies must search out “white space” in the industry, which usually means competing on either one of two fronts-

Differentiation: Driving up prices is one way to increase profitability. To command a premium price, a company must deliver distinctive value to customers. A customer may perceive the high value of any product and be ready to pay a premium due to the differentiation it offers.

Cost Leadership: Driving down costs is another way to increase profitability. To compete on cost, firm must balance price with acceptable quality and become the lowest cost producer in an industry.

A firm can create a cost advantage in two different ways, by reducing the cost of individual value chain activities and by reconfiguring the value chain.

 3. Porter’s 5 Forces: 

Bargaining Power of Buyers : Bargaining power of buyers determines their ability to dictate terms, including price. Bargaining power will be high if the cost of switching supplier is low, buyers are few and buyers buy in high volume from small suppliers. High bargaining power may lead to low prices or high costs, hence resulting in a low margin.

• Bargaining Power of Suppliers: Bargaining power of suppliers determines the cost and quality of input. Bargaining power is higher if a replacement or alternate is not available.
• Threat of Substitute Products or Services : Threat of substitute may cause a loss of revenue (top-line) or an increased cost of retention. Threat will be high if the substitute is perfect in nature and cheaper. Substitute can be from different segment and different industry. Switching cost and the perceived level of product differentiation are also relevant here.
• Threat of New Entrants : New entrants to an industry bring new capacity, the desire to gain market share, and often substantial resources. Hence, the threat of new entrants may damage market share if materialize. The degree of threat depends on the barrier to entry coupled with the reaction from existing competitors that the entrant can expect, apart from perceived profitability. The major sources of barriers to entry are economies of scale, product differentiation, capital requirements, switching costs, access to distribution channels, government policy, etc.
• Rivalry among Existing Firms : Rivalry occurs because one or more competitors either feel the pressure or see the opportunity to improve their position. Competitive moves by one firm generally have effects on its competitors and thus may incite retaliation or efforts to counter the move; that shows firms are mutually dependent. Competition will be stiffer if the number of firms increases, extra capacity exists, products are homogenous, fixed costs are high and exit barriers are also high.

4 .Interconnectedness of Barriers

(Exit Barriers and Entry Barriers) and Profitability – Although exit barriers and entry barriers are conceptually different, their joint level is an important aspect of the analysis of an industry. Often, exit and entry barriers are related. Substantial economies of scale in production, for example, are usually associated with specialized assets, as is the presence of proprietary technology.

5 . Core competencie Analysis

Core Competency is a unique preposition that helps a firm stand out in the industry by providing value to its customers. Core Competency leads to either cost leadership or product differentiation, which are the primary sources for a firm to gain a competitive advantage.

Core competencies can arise out of-

• Resources – Which firm has, and others don’t.

• Capabilities – Ability to coordinate resources and make optimal use of them.

Test of core competency contains three parameters

Relevance – The competence must give your customer something that strongly influences him or her to choose your product or service. If it does not, then it has no effect on your competitive position and is not a core competence.

Difficulty of imitation – The core competence should be difficult to imitate. This allows you to provide products that are better than those of your competition. And because you’re continually working to improve these skills, means that you can sustain competitive position.

Breadth of application – It should be something that opens up a good number of potential markets. If it only opens up a few small, niche markets, then success in these markets will not be enough to sustain significant growth

 6. Value Proposition Canvas                                                                 

Value Proposition describes the benefits that customers can expect from a product and the bundle of products and services that business offer to specific customer segment to create value. The value proposition canvas is the tool that will help the organization to design, test, build, and manage the great customer value propositions. It’s like a plugin for the business model canvas.

The tool is based upon two elements of the business model, i.e., the customer segment for whom the business firm intends to create the value and the value proposition (value proposition map) that will attract customers to the business. With a value proposition canvas, a business firm can map out both of these (customer segment and value proposition) with more granularity and show the fit between what it offers and what customers want.

7. Customer Segment Profile

The customer segment profile describes the characteristics of the business’s customers in more detail. The profile is composed of three elements: first, the jobs (termed as ‘Customer Jobs’) that customers are trying to get done in their service or product; second, the related pains, i.e., aspects outlining the negative aspects that customers hate or like to avoid; and third, the gains, i.e., aspects describing the positive outcomes or benefits that your customers desire to have.

Customer Jobs describes the important issues that business customers are trying to solve/ resolve in their work; it could be their needs that they wish to satisfy or a task that they try to perform and complete in their lives (professional and personal) or at work. (Example: Matrimonial services, legal advice, a specially designed shoe for an internationally recognised player, construction of the house (safety, look, and comfort can be major concerns), ordering food with specifications, face mask/ PPE Kit to protect from specific viruses etc.)

Pains describes anything that annoys the customer before, during, or after getting a job done. This could be unwanted cost, situation, negative emotion, or even risks. Obviously, some of the customer’s pains will be severe, while others are mild.

Gains describe the outcome or benefits that the customer requires, expects, or desires, as well as a complementary benefit that he doesn’t expect, but will be excited about or surprised by if he gets it. This includes things like functional utilities, social gains, positive emotion, and cost savings. Obviously, some of the benefits will be more relevant to customers than others.

8. Value Proposition Map

A value proposition map describes the features of a business’s value proposition that it has designed to address its customers’ jobs (through products and services), pains (through pain relievers); and gains (through gain creators). Hence, a value proposition map is composed of the three elements: firstly, the product and services around which your value proposition is built; secondly, the pain relievers that outlines how the business’s products and services alleviate the customers’ pains; thirdly, the gain creators describe the positive outcomes and benefits that business’s products and services create for your customers.

Products and Services outlines the bundle of products and services that the business is offering to its customers to help them get a functional, social, or emotional / personal job done and to address their pains and gains in the process.

Pain Relievers explicates how your products and services will alleviate specific customer pains before, while, and after the customer tries to get the job done. Pain relievers show or highlight which of all the customers’ pains are addressed by the value proposition by either eliminating or reducing them.

Gain Creators describes how products and services offered by business create customer gains. Gain creators show which of all the customers’ gain s are addressed by the value proposition by creating benefits and outcomes.

Business is said to achieve a problem-solution fit when the features of its value proposition map perfectly match the characteristics of customer segment profile. When the market validates this match and the business value proposition gets traction with real customers, the business has achieved the product-market fit.

Important Question/Topic Asked in SPOM MCQ

Core Competencies- cost leadership and differentiation

1. A case study with taglines of 4 products, in which 2 had taglines like – “why pay more if you can pay less” and 2nd was “get what you pay for” 1st one was cost leadership and 2nd was differentiation.
2. Value Chain Analysis – Primary and Support Activity
3. 2. A case study from porters model asking to identify which force is effected 
4. Mendelow’s Matrix – Table
5. Three Component of Business Model
6. Value Proposition Canvas – Pains, Gains, Pain Relievers, Gain Creators
7. Social, technological, economic, environmental, political, legal, and ethical factors (STEEPLE)
8. Read once and refer Annexure 2 Pg. 1.72 for Porter’s 5 Forces
9. TEST YOUR KNOWLEDGE – Page 1.66