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They called this strategic cost management (SCM) and defined it as the development of cost
information systems for strategic planning. This required three changes in mind-set:
1. A more expansive view for cost analysis is needed. Since many costs are influenced by
decisions made by either upstream or downstream partners, one must move from the internal
company perspective to the value system level. The abrasives example discussed earlier is a
micro-example of this where the costs were a function of the distribution of activities between the
channel partner and the firm, but, again, it was done after the fact. In developing the strategic
plan for implementing the indirect channel, much of the same analysis could have been done ex
ante. It has been rumored that Coca-Cola management has mapped its entire value system from a
customer putting money into a vending machine for a can of Coke all the way back to the sugar
beet farmer and aluminum smelter. Like the small distribution example, once understood, Coca-
Cola managers can then optimize the entire value system rather than the individual pieces.
2. One size does not fit all. A firm pursuing a cost leadership strategy would need a
management accounting system that drove efficiency, since pricing is controlled by market
conditions. Quite the opposite, one pursuing a differentiation strategy would need to focus more
on customer willingness to pay, costs to differentiate, and value-based pricing. In the SCM world,
management accounting systems are designed to fit the strategy.
3. In the strategic planning stage, all costs are variable and are dependent on both the
strategy‟s formulation and its implementation. In the formulation stage, cost drivers now are
based on decisions concerning scale (how big), scope (where to play in the value system),
technology (how to play), and complexity (how broad a product offering). At implementation,
execution factors such as capacity utilization, product design, and employee involvement come to
the forefront. In essence, costs are now driven by strategic choice and the ability to execute.
The entry of Airborne Express into the express mail delivery industry is an excellent example of the
proper use of SCM. A structural analysis of this industry quickly identifies it as not very attractive. It
has high entry barriers, little ability to differentiate, intense competition from two large entrenched
companies (UPS and FedEx), and powerful customers. This competition focused on cost leadership,
and both major players were far along the experience curve. Yet Airborne was able to enter, capture
about 20% of the market, and do it profitability. How did it accomplish this?
In developing its entry strategy, Airborne precisely structured its operations to minimize costs. First,
it assured itself of scale and minimized complexity by targeting a narrow band of high-volume
customers in a limited number of locations. This customer segment had to meet two other criteria
besides high volume—business-to-business and low volatility of demand. It purposely ignored the
residential customer, who created high variability in demand for UPS and FedEx. This target customer
population also allowed Airborne to minimize its technology investment in relation to those two
competitors. An analysis of the most important executional cost driver, capacity utilization, reveals the
wisdom of Airborne‟s structural choices.
The largest cost item for this industry is transportation. Airborne had 175 planes and over 13,000
trucks. For the planes, by targeting that segment of the population with low variability in demand, it
was able to fly its planes at an average of 80% of capacity, substantially higher than the industry
average of 67%. Since all competitors used basically the same type of plane, Airborne calculated its
relative cost of capacity as follows:
At full capacity, the cost per package delivered by plane = $$/Cap, where $$ is the total cost of the
flight (basically fixed) and Cap the number of packages at full capacity.