Strategic cost management is the process of reducing total costs while improving the strategic position of a business. This goal can be accomplished by having a thorough understanding of which costs support a company's strategic position and which costs either weaken it or have no impact. Subsequent cost reduction initiatives should focus on those costs in the second category. Conversely, it may be useful to increase costs that support the strategic position of the business.
For example, the strategy of a manufacturing firm is to be able to offer rapid turnaround of customer orders by maintaining tight control over its bottleneck production operation. To do so, the company incurs extra costs to keep the bottleneck running 24x7. Expending extra funds here directly contributes to the profitability of the business. Conversely, cutting costs at the bottleneck operation will reduce the production capacity of the business and will have an immediate negative impact on its profits. From a strategic perspective, the company would do better to cut costs in non-bottleneck areas that are downstream from the bottleneck operation, since these cuts would have no impact on the delivery times quoted to customers.
It is almost never worthwhile to cut costs in strategically important areas, since doing so reduces the customer experience and therefore will eventually lead to a decline in sales. Consequently, management needs to be involved in cost reduction activities, so that they can provide input regarding how certain costs must be incurred in order to support the competitive position of the firm.
Strategic cost management is a continuing process, since the strategy of a firm may change over time. Thus, certain costs may be sacrosanct when one strategy is being used, but can be readily eliminated when the strategy shifts.