Towards a conceptual framework for strategic cost management [Elektronische Ressource] : the concept, objectives, and instruments / vorgelegt von Ibrahim Abd El Mageed Ali EL Kelety
556 Pages
English

Towards a conceptual framework for strategic cost management [Elektronische Ressource] : the concept, objectives, and instruments / vorgelegt von Ibrahim Abd El Mageed Ali EL Kelety

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Towards a conceptual framework for strategic cost management - The concept, objectives, and instruments - Von der Fakultät für Wirtschaftswissenschaften der Technischen Universität Chemnitz genehmigte Dissertation zur Erlangung des akademischen Grades Doctor rerum politicarum (Dr. rer. pol.) vorgelegt von Ibrahim Abd El Mageed Ali El Kelety geboren am 11.01.1965 in El Menoufia - Ägypten eingereicht am: 14. Juni 2006 Gutachter: Prof. Dr. Uwe Götze Prof. Dr. Dr. h.c. Jürgen Bloech Prof. Dr. Peter Schuster Tag der mündlichen Prüfung: 18. Juli 2006 Acknowledgement To the Almighty God “ALLAH” Who have granted me all these graces to fulfill this work and Who supported me in all my life. To Him I extend my heartfelt thanks. It is a pleasure to express my sincere and deepest heartfelt gratitude to my “Doktorvater“ Prof. Dr. Uwe Götze for his kind supervision, continuous encouragement, valuable enthusiastic discussion and unfailing advice throughout the present work, as well as financial support during my latest period of study in Germany. He assisted in all matters, provided solutions to different problems. Prof. Dr. Uwe Götze supported and helped me during my learning period in Germany and writing this thesis.

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Published 01 January 2006
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Towards a conceptual framework for strategic cost management

- The concept, objectives, and instruments -



Von der Fakultät für Wirtschaftswissenschaften der
Technischen Universität Chemnitz

genehmigte

Dissertation

zur Erlangung des akademischen Grades

Doctor rerum politicarum

(Dr. rer. pol.)

vorgelegt von

Ibrahim Abd El Mageed Ali El Kelety


geboren am 11.01.1965 in El Menoufia - Ägypten


eingereicht am: 14. Juni 2006

Gutachter: Prof. Dr. Uwe Götze
Prof. Dr. Dr. h.c. Jürgen Bloech
Prof. Dr. Peter Schuster


Tag der mündlichen Prüfung: 18. Juli 2006



























Acknowledgement

To the Almighty God “ALLAH” Who have granted me all these graces to fulfill this work
and Who supported me in all my life. To Him I extend my heartfelt thanks.

It is a pleasure to express my sincere and deepest heartfelt gratitude to my “Doktorvater“
Prof. Dr. Uwe Götze for his kind supervision, continuous encouragement, valuable
enthusiastic discussion and unfailing advice throughout the present work, as well as financial
support during my latest period of study in Germany. He assisted in all matters, provided
solutions to different problems. Prof. Dr. Uwe Götze supported and helped me during my
learning period in Germany and writing this thesis. I am very lucky being one of his students.

I would like to express my deep thanks to Prof. Dr. Dr. h.c. Jürgen Bloech - Georg-August
University of Göttingen - for his kind acceptance to act as an examiner. I would also like to
express my sincere thanks to Prof. Dr. Peter Schuster - The University of Applied Sciences
in Schmalkalden - for his kind acceptance to act as an examiner.

I am extremely grateful to my parents, who did all the best to help me in my education, my
sisters and my brothers for their love and support. I am extremely thankful to my wife for her
support and encouragement giving me the strength and comfortable atmosphere to finish this
study. To my pretty daughters Nada, Nayra and Maryam, for their lovely smiles that can
relieve any kinds of tiredness.

I would like to thank all staff members and my colleagues in the Chair of Management
Accounting and Controlling - Faculty of Business Administration and Economics - Chemnitz
University of Technology - for nice, friendly talking, valuable discussions and for their help.

I would like to thank the Egyptian Ministry of Higher Education, the Egyptian Government,
and Faculty of Commerce - Menoufia University for the financial support during my study in
Germany.

To all of you, Thank you very much.
Ibrahim Abd El Mageed Ali El Kelety
Chemnitz, July 2006
Contents

Figures ............................................................................................................................vii
Tables................................................................................................................................xi
Abbreviations.................................................................................................................xii


1. Introduction ................................................................................................................1

2. Trends and Changes in the Business Environment................................................12
2.1. Changes of the Markets and a Greater Focus on the Customer..........................12
2.2. Shifts in the Basis of Competition......................................................................16
2.3. Advances in the Manufacturing and Information Technologies ........................20
2.4. New Forms of Management Organization .........................................................22

3. Strategic Management ..............................................................................................26
3.1. The Concept of Strategic Management ..............................................................26
3.2. The Strategic Management Process....................................................................28
3.3. Levels of Strategy...............................................................................................35
3.4. Competitive Strategies and Firm Success ..........................................................36
3.4.1. Porter’s Competitive Strategies36
3.4.1.1. Cost-Leadership Strategy........................................................37
3.4.1.2. Differentiation ...........................................................37
3.4.1.3. Niche Market Strategy.............................................................38
3.4.1.4. A Combination of Generic Strategies - Stuck in the Middle...39
3.4.1.5. Support for Porter ....................................................................40
3.4.1.6. Criticisms of Porter..................................................................41

4. Traditional Cost Management and Long-Term Firm's Success...........................44
4.1. Literature Review.....................................................................................44
4.2. Evaluation of Traditional Cost Management - Some Examples .............. 48
4.2.1. Non-Financial Controlling-Information.................................................48
4.2.2. Standard Cost Perspective and Cost Management .................................50
4.2.3. Diversity and Complexity in the Manufacturing....................................53
4.2.4. Strategic Influence on the Costs .............................................................54
4.2.5. Adequate Support for Introducing of New Technologies ......................55
4.2.6. Market Orientation.................................................................................56
4.2.7. Conclusions............................................................................................57
ii
5. Strategic Cost Management - Concept, Objectives, and Suggested Framework 59
5.1. The Issue of Terminology ..................................................................................59
5.2. The Strategic Importance of Cost Management.................................................60
5.3. The Concept of Strategic Cost Management......................................................61
5.4. Concerns and Objectives of Strategic Cost Management ..................................66
5.5. The Suggested Framework for Strategic Cost Management and its Objectives 75

6. Strategic Cost Management - Guiding Principles and Key Concepts ..................80
6.1. The Guiding Principles of Strategic Cost Management .....................................80
6.2. Strategic Cost Management - Key Concepts......................................................82
6.2.1. ent - Cost Drivers ...........................................83
6.2.1.1. The Concept of Cost Drivers...................................................83
6.2.1.2. Cost Drivers - Traditional Views ............................................84
6.2.1.3. Cost Drivers - Strategic Views ................................................94
6.2.1.4. The Basic Outline of Cost Drivers ........................................107
6.2.1.5. Ways of Identifying Cost Drivers..........................................116
6.2.2. Strategic Costs Management - Value Chain Analysis..........................121
6.2.2.1. The Value Chain Concept .....................................................121
6.2.2.2. The Fundamental Methodology of Value Chain Analysis
for Cost Management ............................................................124
6.2.2.2.1. Identify the Value Chain Activities and
Disaggregate the Firm into Separate Activities...125
6.2.2.2.2. Establish the Relative Importance of Different
Activities in the Total Cost of the Product ..........127
6.2.2.2.3. Compare Costs by Activity .................................129
6.2.2.2.4. Identify Cost Drivers ...........................................129
6.2.2.2.5. Identify linkages and Interrelationships in the
Value Chain…….……………………………….130
6.2.2.2.6. Identify Opportunities for Reducing Costs
and /or Improving Value .....................................135

7. Strategic Cost Management - Objects ...................................................................140
7.1. Product as a Strategic Cost Management-Object .............................................141
7.1.1. Product Design and Development approaches and product cost
Management .........................................................................................142
7.1.1.1. Design for Manufacture & Assembly....................................144
7.1.1.2. Customer Oriented Product Design and Development .........148
7.1.1.3. Product Design and Complexity Management......................154
7.1.1.4. Product Design to Cost Objectives........................................159
iii
7.2. Process as a Strategic Cost Management-Object .............................................163
7.2.1. Process Awareness Increasing and the Company’s Success................163
7.2.2. The Business Process Concept .............................................................167
7.2.3. Identification and Selection of Business Processes..............................170
7.2.4. Levels of Business Process Improvement ............................................178
7.2.5. Strategic Cost Management and the Dimensions of Process
Improvement.........................................................................................184

7.3. Resources as a Strategic Cost Management-Object .........................................196
7.3.1. The Resources of an Organization - the Concept and Dimensions ......196
7.3.2. Strategic Cost Management and the Resources Dimensions................202
7.3.2.1. ent and the Type of Resource
Acquired................................................................................202
7.3.2.1.1. Purchasing and Strategic Cost Management .......203
7.3.2.1.2. Human Resources and Strategic Cost
Management........................................................210
7.3.2.2. How Resources Are Used in the Value Chain and
Strategic Cost Management...................................................217
7.3.2.3. Traceability of Resources and Strategic Cost Management..220
7.3.2.4. Level of Cost Driver and Resource Cost Management .........227

8. Strategic Cost Management - Analysis Fields & Activities .................................230
8.1. Introduction......................................................................................................230
8.2. Cost Behavior Management .............................................................................231
8.2.1. The Concept of Cost Behavior .............................................................231
8.2.2. ent - the Concept and Objective ...................236
8.2.3. The Effective Utilization of Capacity and Cost Behavior
Management .........................................................................................237
8.2.4. Experience Effects and Cost Behavior Management ...........................247
8.2.5. Complexity Management and Cost Behavior Management.................251
8.2.6. Cost-Flexibility and Cost Behavior Management ................................263
iv
8.3. Cost Level and Cost Structure Management ....................................................268
8.3.1. The Concept and Objects of Cost Level and Cost Structure
Management .........................................................................................268
8.3.2. The Implications of Cost Level and Cost Structure .............................272
8.3.3. Overhead Cost Management ................................................................277
8.3.3.1. The causes of the rapid growth of the overhead costs...........277
8.3.3.2. Effects of the Increasing Costs of Overhead and
Objectives of Overhead Cost Management...........................279
8.3.3.3. Instruments of Overhead Cost Management .........................281
8.3.3.3.1. Introduction ...........................................................281
8.3.3.3.2. Overhead Value Analysis .....................................283
8.3.3.3.2.1. The Concept of Overhead Value
Analysis and its Development........283
8.3.3.3.2.2. The Objectives of Overhead Value
Analysis..........................................284
8.3.3.3.2.3. The Phases of Overhead Value
Analysis286
8.3.3.3.2.4. Evaluation of the Overhead Value
Analysis..........................................294
8.3.3.3.3. Zero-Base Budgeting...........................................296
8.3.3.3.3.1. The Concept and Objectives of
Zero-Base Budgeting......................296
8.3.3.3.3.2. Zero-Base Budgeting Steps.............299
8.3.3.3.3.3. Evaluation of Zero-Base Budgeting.303
8.3.4. Fixed Cost Management.......................................................................306
8.3.4.1. Concept, Tasks and Objectives of Fixed Cost Management. 306
8.3.4.2. The Difference between Operational and Strategic Fixed
Cost Management..................................................................313
8.3.4.3. Instruments of Fixed Cost Management................................315
8.3.4.3.1. Instruments of Operational Fixed Cost
Management........................................................316
8.3.4.3.2. Instruments of Strategic Fixed Cost Management 326
8.3.4.4. Evaluation of the Fixed Cost Management Approaches .......329
v
9. Strategic Cost Management - Instruments and Key Support Factors ...............333
9.1. Instruments of Strategic Cost Management......................................................333
9.1.1. Activity Based Costing and Management ............................................333
9.1.1.1. The Origins of Activity Based Costing and Management.....333
9.1.1.2. The Problem with Traditional Costing Systems and
the Need for ABC/M .............................................................335
9.1.1.3. The Concept and Objectives of Activity-Based Costing.......338
9.1.1.4. Construction of an Activity-Based Costing System..............341
9.1.1.5. Activity Based Management - the Concept and Objectives..347
9.1.1.6. Framework for the Design of an ABM System.....................350
9.1.1.6.1. Analysis of Activities ..........................................351
9.1.1.6.2. Cost Driver Analysis ...........................................354
9.1.1.6.3. Performance Measurement Analysis...................355
9.1.1.7. Activity-Based Costing and Management - Cost
Management Applications.....................................................358
9.1.1.7.1. Reduction Cost - the Activity-Based Way ..........
9.1.1.7.2. Activity-Based Budgeting ...................................361
9.1.1.7.3. Product Planning and Design ..............................363
9.1.1.7.4. Process Improvement ..........................................364
9.1.1.7.5. Quality Management and Control .......................366
9.1.1.8. Implementation of ABC/M....................................................368
9.1.1.8.1. Factors Influencing Success in Implementation
ABC/M................................................................368
9.1.1.8.2. Stages of the Implementation Process of 371
9.1.1.9. Evaluation of ABC/M............................................................374

9.1.2. Target Costing ......................................................................................379
9.1.2.1. Origins and Development of Target Costing.........................379
9.1.2.2. Definition and Nature of Target Costing...............................381
9.1.2.3. Key Principles and Objectives of Target Costing .................384
9.1.2.3.1. Target Costing - Key Principles ..........................384
9.1.2.3.2. Objectives of Target Costing...............................388
9.1.2.4. Target Costing Process Steps ................................................391
9.1.2.4.1. Establishing the Target Price393
9.1.2.4.2. Establishing the Target Profit Margin .................396
9.1.2.4.3. Determining the Current Cost and Target Cost...399
9.1.2.4.4. Disaggregating the Target Cost to Components
and Functions.......................................................405
9.1.2.4.5. Realizing the Target Cost ....................................408 vi
9.1.2.4.6. Monitoring and Repeating the Target Costing
Process.................................................................414
9.1.2.5. Success Factors for Target Costing Implementation.............418
9.1.2.6. Integrating Target Costing and ABC/M in the Context
of SCM-Framework...............................................................423
9.1.2.7. Evaluation of target costing...................................................428

9.1.3. Life Cycle Costing ...............................................................................433
9.1.3.1. The Concept of Life Cycle Costing.......................................433
9.1.3.2. The Significance and Objectives of Life Cycle Costing .......436
9.1.3.3. Product Life Cycle and Perspectives in Life Cycle Costing .439
9.1.3.4. Cost Reduction and Revenue Enhancement under
Life Cycle Costing.................................................................447
9.1.3.5. Regaining Competitive Advantage with Life Cycle Costing..454
9.1.3.6. Integrated Cost Management under Life Cycle Costing .......456
9.1.3.7. Evaluation of Life Cycle Costing ..........................................458

9.1.4. Benchmarking.......................................................................................460
9.1.4.1. A Brief History of Benchmarking .........................................460
9.1.4.2. The Concept and Characteristics of Benchmarking ..............462
9.1.4.3. Types of Benchmarking .......................................................465
9.1.4.4. The Benchmarking Process ..................................................469
9.1.4.5. The Pitfalls and success Factors of Benchmarking ..............476
9.1.4.6. Linkages between Benchmarking and other Cost
Management Techniques477

9.2. Strategic Cost Management - Key Support Factors ..................................... 479

10. Summary and conclusions ............................................................................. 481

References ............................................................................................................ 485